As economic activities have come to a halt due to coronavirus-induced lockdown in the country, the government’s fiscal stimulus may play a major role in combating the situation. While it will make a severe dent in the fiscal deficit numbers, to keep the economy running is on the centre’s priority so far. Given the dominance of the informal sector in the economy along with poor social security, the sudden stop in economic activity along with a prolonged period of social distancing will require fiscal and monetary policy support, said Kotak Economic research report. The center and state governments need to provide support to livelihoods and businesses impacted by Covid-19, in spite of a weak revenue outlook, it added.
Even as Finance Minister Nirmala Sitharaman has already announced a mega economic package, it is expected that another package of Rs 1 lakh crore may be needed to fulfill the need of the hour. The Kotak research shows space for an additional expenditure of around Rs 1 lakh crore through transfers to Jan Dhan accounts, additional PM-KISAN spends, health care infrastructure, and additional transfers to NREGA beneficiaries. India’s MSME segment may also require support if the lockdown extends.
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Various analyses show that the fiscal deficit of the government may exceed the 5% per cent mark in the current fiscal, however, given the current situation, lesser attention is given to the concern. The prolonged slowdown even before the coronavirus outbreak in the country had kept the government’s revenue targets on edge. The revenue receipts in the first eleven months of the last fiscal also show that it continued to struggle to meet the fiscal’s revised revenue targets.
In a situation that needs the government to keep its purse strings loose, the additional liquidity is most likely to be generated from market borrowings. Recently, the RBI has released the borrowing calendar for FY21. “One of the key components of financing the fiscal deficit of the government is the market borrowings,” said a report by Care Ratings. The RBI has announced the market borrowing program where the central government will borrow to the extent of 62.5 per cent, that is Rs 4.88 lakh crores, out of the FY21 budget estimate of Rs 7.8 lakh crores in the first half of the fiscal, it added.