Unfortunately, the government’s own finances have been in a shambles for some time, and the deficit will overshoot badly.
With the 21-day lockdown expected to shave 4% off FY21 GDP and economists forecasting a 0.5-3% growth, it is clear the government needs to do all the heavy-lifting. More so, since private investments have been slowing for several years. Unfortunately, the government’s own finances have been in a shambles for some time, and the deficit will overshoot badly. But there are few options because, in the absence of a big stimulus, the economy could well start contracting, causing huge stress to crores of workers, and long-lasting damage as firms start shutting down. Even as it assesses the funding requirements of various sectors, a back of the envelope calculations shows, the government may need to pump in close to Rs 4 lakh crore to take care of welfare schemes for the under-privileged and reboot the economy.
There has been talk of how, using Clause 3 of Section 5 of the FRBM Act, RBI can start subscribing to bonds in the primary market, a practice discontinued as it amounted to automatic monetising of the deficit. Announcing a Corona Bond which RBI can subscribe to in the primary market, on the other hand, will allow the government to raise funds while, at the same time, making it clear that this is a one-off to deal with extenuating circumstances. To begin with, the size of the issue should be around Rs 3 lakh crore, and since these would be issued in the primary market, they will not impact the yields. Another Rs 1 lakh crore could be mopped up via retail tax-free bonds—they would be lapped up at a coupon of 5%, given how interest rates on fixed deposits have been drastically reduced.
It is critical the government moves fast, before the economy loses further momentum. Already, the shortfall in tax collections for FY21 could be materially high even if the pandemic results in a disruption for just a quarter and normalcy were to be restored by June. It is very unlikely that consumers will start spending on even small-ticket items and durables, and big-ticket purchases of houses could be postponed till the next year. Moreover, the sale of companies such as Air India and BPCL could be scuppered in such an environment; a weak stock market would result in a huge shortfall in disinvestment proceeds. It is also hard to see the government generating any revenues from the auction of spectrum. The slippage in revenues could be at least 2-2.5% of GDP, or roughly Rs 4 lakh crore, though the higher levies on auto fuels should fetch the government some Rs 60,000 crore. This will somewhat offset the fresh expenditure of an equivalent amount announced last week as part of the Rs 1.7 lakh crore welfare package. It is imperative the government gets into spending mode quickly; there is nothing to be gained by delays, but a lot to be lost.