Covid-19: How the cookie crumbles

On February 28, 2008, when finance minister P. Chidambaram got up in Parliament to unveil the Union Budget of 2008-09, little did he know what was in store for the global and Indian economy in the coming months.

At that point in time, the Indian economy was chugging away nicely, having grown at 8% gross domestic product (GDP) for 12 successive quarters—till December 2007—and there was a lot of optimism that this growth would only accelerate in the years to come. That belief got a further boost when the finance minister opened his speech in Parliament saying that “the Indian growth story, so far, has been an absorbing and inspiring one.’’

In fact, the first three years of the United Progressive Alliance government, the GDP had grown by 7.5%, 9.4%, and 9.6%, resulting in an unprecedented average growth rate of 8.8%, and Chidambaram said that he was confident that the economy will continue to maintain the average of 8.8%.

A sense of optimism reigned in many sectors, which saw a considerable hike in their outlays; Chidambaram also “promised a 20% rise in education and a 15% increase in health spending to spread the benefits of an economic boom beyond the cities to rural areas.”

What was most interesting was the government’s revenue and fiscal deficit numbers were better than the Budget Estimates. For FY07, the revenue deficit was 1.4% of the GDP compared to the Budget Estimate of 1.5% in the FY06 and the fiscal deficit of 3.1 % was actually .2% less than what was estimated a year earlier.

And a confident Chidambaram said that further progress will be made in 2008-09. While the revenue receipt of the Central government was projected at Rs 6,02,935 crore for 2008-09 , the revenue expenditure was kept at Rs 658,119 crore ensuring that the revenue deficit was pegged at 1% of the GDP. Similarly, the fiscal deficit, estimated at Rs 1,33,287 crore was kept at 2.5% of the GDP, which was below the target set by the Fiscal Responsibility and Budget Management Act.

But when the Lehmann Brothers collapsed in the U.S. on September 15, 2008, all hell broke loose. The Indian economy too was hit, but the impact was less compared to what some other countries went through. But on July 6, 2009, when Pranab Mukherjee, then finance minister, was presenting the Union Budget for FY10, the rosy picture of the Indian economy had changed completely.

The high GDP growth trajectory of 8.8% had given way to 6.7% during FY09 despite three focussed fiscal stimulus package in the form of tax relief and increased expenditure on public projects along with the RBI taking a number of monetary and liquidity-enhancing measures. The total fiscal stimulus of Rs1,86,000 crore was nearly 3.5% of the GDP at 2008-09 current prices and the total expenditure was increased by 36% over that of 2008-09. “This fiscal expansion will go a long way in reversing the impact of economic slowdown and accelerate our growth revival in the medium term,” Mukherjee said.

However, the fiscal accommodation had a negative side, too. It saw the country’s fiscal deficit surge from 2.7% in FY08 to 6.2% in FY09 (revised upwards from 2.5% in the Budget Estimate) to 6.6% in FY10 as against 6.7% of GDP estimated in the Budget. The revenue deficit too jumped to 4.8% from the Budgeted Estimate of 1% in FY09. Not just that even wholesale price index saw a sharp rise of 13% in August 2008.

If the great financial crisis could bring a growing nation to its knees, imagine what the impact of the Covid-19 shock could do to the country’s growth numbers and the consequent fiscal and revenue deficit numbers in FY20 and FY21. The revenues numbers were already looking a little shaky in FY20 because of the government’s high estimate in the last three months as compared to the rest of the year. The government is unlikely to meet the target of collecting Rs1 lakh crore from the goods and services tax every month given the state of the economy today. Again financial gains from schemes like Vivad Se Vishwas are unlikely to flow in at any time now.

The disinvestment target of Rs1,05,000 crore in FY20 now seems like a distant dream. Finding a strategic buyer for Air India seems most unlikely, given that the entire aviation industry is desperately trying to keep its head above water as more and more countries cancel domestic and international flights. Even finding a suitor for the profitable Bharat Petroleum Corporation looks difficult since most oil majors are struggling with oil prices virtually scraping the barrel.

The choice for the government is simple. Go on a borrowing spree to save the nation by diluting the FRBM Act or say goodbye to the 10% nominal GDP growth rate for FY21.