Pandemic response straining Indian Central Government's Finances


With almost 7745 deaths and over 270,000 total infections, the coronavirus spread is growing strong in India. A nation-wide lockdown leading to nearly no business activity has affected the Indian central government's finances significantly. The crisis has magnified the already present issues in our economy. Here is an analysis of the Central government's pre-pandemic trend of receipts, expenditure, and how it is being further degraded during the nation-wide lockdown. We will also briefly discuss the challenges ahead of the government at the time of the widening fiscal deficit.

Deteriorated Receipts

The Indian economy was gradually derailing for almost the last two years, much before it faced the biggest roadblock in terms of a nation-wide shutdown. India's GDP was shrinking at a faster rate, and its tax revenue rate had been volatile for a while now. India's real GDP has been showing a downward trend since the last quarter of 2017. It fell to its lowest growth of 3.1% YoY in Q1 2020 from 8.7% YoY in Q4 2017. The growth rate in tax revenue has also not been able to get beyond a single-digit since August 2018.

Declining trend in Central government’s tax revenue and GDP growth

The outbreak of coronavirus worsened the situation for the economy. The Indian government declared a nation-wide shutdown in the last week of March, resulting in lower business activity, as is evident through growth in eight core sectors output in March and April 2020. It contracted by a whopping 38.1% YoY in April 2020 and by 6.5% YoY in March 2020.

Lower economic activity stemming from the COVID-19 pandemic added more pressure on the central government’s finances. The growth in tax revenue measured in terms of 12month average YoY went into negative in April 2020 for the first time since mid-2010. This was primarily due to lower income tax, corporate tax, and goods and services (GST) collections. This trend is likely to be sustained for the upcoming months until the business activities get back to normalcy.

Soaring Expenditure is an added burden

The Indian central government’s expenditure pattern was believed to be prudent until mid of 2019. The total expenditure moved from a high of 17.5% in terms of 12month rolling sum of GDP in October 2009 to 11.9% in June 2019. However, for almost a year now, it is gradually escalating. It touched 13.53% in April 2020, the highest in three years. It may be an arduous task for the government to tame the growing expenditure as it has limited room to reduce its expenditure owing to COVID-19 pandemic.

Ballooning up of expenditure since July 2019

The Deepening Deficit

The government's high spending rate, coupled with lower tax collection, has led to the widening of fiscal deficit in FY2019-20. The Indian government had enacted the FRBM Act in 2003 that called for retaining the fiscal deficit below 3%. In February this year, the Indian government revised the fiscal deficit target for FY2019-20 from 3.3% to 3.8%. It missed even its revised target as the deficit stooped to 4.6% of GDP.

Dwindling fiscal balance of India

In April, the fiscal deficit has further widened to 5.23% in terms of 12month sum, as a % of GDP. It seems unlikely for the government to be able to keep the fiscal deficit below its current year target of 3.5%.

Challenges Posed by the Stimulus Package

A fiscal stimulus package was due for India's long-standing economic struggles. Last month the central government announced a Rs 20 Trillion aid package after adjusting the borrowing limit to Rs 12 Trillion. This is likely to create further pressure on India's Debt-to-GDP ratio, which is already at 72.1%.(Source). India’s growing debt has already called for degradation of its sovereign ratings and can damage its credit profile internationally.

Current needs vs. opting for structural reforms

It is evident that we are passing through unprecedented times. Despite the Central government's weak financial status, the priority should be on quick repair for the damage done. The financial aid package aims to inject required liquidity in the market and provide the driving impetus to businesses. Though pursuance of fiscal prudence may help in the longer run, the government shouldn't care less to look after the short-term needs.

Written by:

Guest Columnist

Amit Parhi

[email protected]