Second Covid wave reignites growth and fiscal uncertainty  

ICRA expects the growth of GDP (at constant 2011-12 prices) to have risen to 2.0 percent in Q4 FY2021 from the anaemic 0.4 percent in Q3 FY2021. Consequently, we expect GDP to have contracted by 7.3 percent in FY2021 as a whole.

Despite the welcome onset of the vaccination drive, the second surge in COVID-19 cases has led to the proliferation of localised lockdowns across various states, subduing sentiment and demand.

We currently expect real GDP to expand in the range of 8-9.5 percent in FY2022, and will fine-tune this forecast after the data for FY2021 is made available on May 31 by the National Statistical Office.

Benefitting from the localised lockdowns, the new COVID-19 infections appear to have peaked in some states. The extent to which localised restrictions are continued in the coming months will impact the timelines of the recovery.

Other key monitorable is whether an accelerated pace of vaccine rollout can prevent a third Covid surge. Needless to say, the economic outlook remains highly uncertain, and periodic material revisions to our growth forecasts may persist in FY2022, as was the case in FY2021.

Notwithstanding the risks posed by the localised restrictions to economic activity and demand, the growth target embedded in the Budget Estimates (BE) for the GoI’s gross tax revenues for FY2022, relative to the provisional figures for FY2021 released by the Ministry of Finance, is moderate at 10.0 percent.

At present, we do not expect the net tax revenues to be meaningfully lower than the budgeted level.

Moreover, the RBI’s higher-than-budgeted surplus transfer of ~Rs. 1.0 trillion to the GoI in FY2022 offers a cushion. While the pipeline is healthy, sentiments soured by the second wave of Covid-19 infections may delay the fructification of disinvestment in some marquee names. In our view, this poses the biggest risk to the budgeted level of receipts in FY2022.

We believe that Rs. 0.8-1.0 trillion of debt raised by the Food Corporation of India from the National Small Savings Fund, which was planned to be serviced in FY2022, was prepaid in FY2021. If so, this opens up some fiscal room to absorb extra expenditure in FY2022.

So far, additional expenditure of Rs. 0.4 trillion for free foodgrain and fertiliser subsidy has already been announced by the GoI. Moreover, the allocation for MGNREGA may need to be enhanced, given the return of migrants to the hinterland.

At this stage, there is a modest risk that the GoI’s fiscal deficit in FY2022 will be higher than budgeted.

Given the expected prolonged impact of the second surge on sentiment, demand in rural and urban areas may need to be supported, through a combination of extension of free foodgrains, cash transfers, enhanced MGNREGA allocation, modest cuts in excise duty on fuels, as well as expedited vaccine availability. However, the space for a fiscal stimulus is clearly limited, making effective targeting crucial.

—Aditi Nayar is Principal Economist, ICRA. The views expressed are personal