Do not panic when Finance Minister Nirmala Sitharaman reads out the revised estimates

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Do not panic when Finance Minister Nirmala Sitharaman reads out the revised estimates
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  • From tax collections to disinvestment to fiscal deficit, the numbers are likely to be sharply lower than the projections in the last budget.
  • The coronavirus pandemic had led to two straight quarters of contraction in the economy and that is likely to hit the budget projections.
  • These are some of the estimates that you can use to pare your expectations based on ground realities.
  • Check out the latest news and updates on Budget 2021 on Business Insider.
In an aspirational goal of becoming a $5-trillion economy by 2025, India’s Finance Minister Nirmala Sitharaman put forward some projections last February. However, the COVID-19 pandemic is likely to have thrown those estimates out of whack. In a year when the economy contracted for two straight quarters, the scary revised estimates should not come as a surprise.

As Aditi Nayar, principal economist at ICRA put it, in a conversation with Business Insider, the numbers would be much lower than what was targeted last year given the ongoing pandemic. “We need to have very practical expectations,” she added.

These are some of ICRA’s expectation from the revised estimates:

ComponentsFY20 Budget targetsICRA estimateEdelweiss estimateNirmal Bang estimate
Tax revenue₹24.23 lakh crore20% shortfall15.1% shortfall 13.3% shortfall
Fiscal deficit3.5% of GDP7.5% of GDP7% of GDP7.4% of GDP
Disinvestment receipts₹2.1 lakh crore₹1.5 lakh crore₹1.4 lakh crore₹1.7 lakh crore

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The lockdown imposed by the central government in an attempt to contain the coronavirus in the country contributed to the sluggish revenue collection by directly impacting businesses' functioning. As per latest data released by the Controller General of Accounts (CGA) at the end of November, the government's gross tax revenue was at ₹10.26 lakh crore, contracting 12.6% during this fiscal year.

According to ICRA, the tax revenue is likely to be 20% short of the ₹24.23 lakh crore expected by the Finance Minister in the last budget.

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Do not panic when Finance Minister Nirmala Sitharaman reads out the revised estimates
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While tax collections fell, the market crash due to the pandemic also put the brakes on disinvestment⁠— the process of government selling its assets like shares like in the case of Life Insurance Corporation of India (LIC), or entire companies, like Air India.

Therefore, the government did not make as much money as it wanted to whereas its expenses increased. From the management of the pandemic, creating health infrastructure in a hurry, to supporting the poor with free food, and helping the struggling industries with the stimulus package.

When the government spends more than it earns, the difference is called fiscal deficit. It is likely that the deficit may be nearly twice as much as the Finance Minister promised during her last budget speech.

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This pain may spill into the next year as well. Therefore, Nayar said that as long as Sitharaman’s estimate for the budget deficit is less than 5% for the financial year ending March 2022, it is acceptable.

Do not panic when Finance Minister Nirmala Sitharaman reads out the revised estimates
BI India

The budget estimates for the upcoming fiscal year may be soothing as the economy seems to be turning a corner. “For the third quarter as a whole, we've got most indicators having shown a year-on-year expansion, and that again is something that's really important as an import for economists like me who need to figure out whether we are already, out of the recession or we are going to get out of the recession in the current quarter,” said Nayar.

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However, the revised estimates are going to look bad. The only question will be if they are better or worse than the expectations.

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