(This is a two-part article analysing whether the wide comparisons being drawn between the Indian and Sri Lankan economies are valid. While India is certainly not going the Sri Lanka way, it needs to acknowledge some red flags of its own. You can read the first part here.)
Much of the social media commentary in India on Sri Lanka's economic situation seems to be drawing comparisons between the two economies. While we saw in the previous article how such comparisons are too simplistic and are based on a misplaced understanding of India’s situation, analysing India’s macro-public finance numbers while narrowing down the focus on its public debt position is an exercise worth pursuing at this stage.
No Fiscal Slippage, But...
As per CMIE figures, the Central government managed to arrest its fiscal deficit at Rs 15.87 trillion in 2021-22, Rs 45.5 billion below its revised estimate. The deficit amounted to 6.7% of the GDP as against the revised estimate of 6.9%. The government spent Rs 241.7 billion more than its revised estimate for 2021-22.
Its revenue expenditure, at Rs 32 trillion, exceeded the revised estimate by Rs 333.1 billion, while capital expenditure, at Rs 5.93 trillion, fell short of its revised estimate by only Rs 91.4 billion. The Centre’s disinvestment receipts, at Rs 146.4 billion, were way below their revised estimate of Rs 780 billion. But net tax revenue and non-tax revenue exceeded their revised estimates by Rs 552.5 billion and Rs 342.5 billion, enabling the government to stick to its expenditure plans without a fiscal slippage.
The Central government’s expenditure programme for 2022-23 had a rather slow start. In April 2022, the government spent Rs 2.7 trillion. Although this was 21.2 per cent higher year-on-year, the expenditure accounted for not even 7% of the annual budgeted amount of Rs 39.4 trillion. Since the Modi government came to power in May 2014, it has spent, on an average, 9.4 per cent of its annual budgeted expenditure in the very first month of the fiscal year. The government spent Rs 789 billion, or 10.5% of its annual budgeted capital expenditure in April 2022.
Revenue expenditure, at Rs 2 trillion in April 2022, accounted for 6.1% of the annual budgeted revenue expenditure. The progress was slow despite Finance Minister Nirmala Sitharaman having promised an additional fertiliser subsidy of Rs 1.1 trillion for the current fiscal and an extension of the PMGKAY till September 2022 at a cost of Rs 800 billion.
... a Silent Fiscal Crisis in the Making?
On the revenue side, the government managed to garner 8.9% of its net tax collections targeted for 2022-23 in April. These amounted to Rs 1.8 trillion. The Centre’s net tax revenue flows are expected to get impacted going forward due to the excise duty cuts on petroleum fuels and reduction in import duties on a few other products. The government has estimated the revenue loss on this account at over Rs 1 trillion.
Non-tax revenue receipts, at Rs 119.4 billion, contributed only 4.4% to the annual budgeted target in April 2022. Non-debt capital receipts, which mainly comprise disinvestment proceeds, measured a meagre Rs 34.9 billion in April 2022. The gross fiscal deficit (GFD), at Rs 748.5 billion in April 2022, was lower than the last year’s, Rs.787 billion. It accounted for 4.5% of the annual budgeted target.
But despite optimistic GST revenues, there is limited fiscal success to cite for India’s macro-fiscal scenario, which, according to Dr Rathin Roy, is experiencing a “silent fiscal crisis” triggered by a recession: “A consistent fall in gross domestic product or GDP for three accounting years straight”.
According to Dr Roy, India’s ‘recession’, more unique to a developing country context, was ongoing since FY16 with the usual consequences, particularly falling tax revenue buoyancies.
Dr Roy argued more recently:
“Tax buoyancy in FY22 was 1.4 compared to 0.8 in FY19 but, worryingly, this is projected to fall to 0.67 in FY23, indicating that the rising buoyancy was temporary and largely due to the base effect… The fiscal crisis thus remains with us and has, in fact, been exacerbated in two important ways. First, the government has not resolved its revenue problems. However, the laudable realism of moderating expectations does not solve the problem of low revenue buoyancies, an important driver of India’s silent fiscal crisis. This means that unless the government intends to lower the deficit through expenditure compression, the need to borrow will continue to rise in the medium term.”
And this is what the Indian government would need to watch out for. Its ‘need to borrow’, either domestically or through external means (in foreign currency), will enforce a higher macro-debt-to-GDP ratio in the short-to-medium term for both the Central and state governments.
Macro-Credit Growth: A Mixed Picture
The Reserve Bank of India (RBI), on 8 June 2022, hiked the repo rate by 50 basis points (bps) to 4.9%. Earlier on 4 May 2022, the RBI had gone for an off-cycle rate hike of 40 bps. The monetary policy statement clearly mentioned a withdrawal of the accommodative policy stance to pull inflation back within the RBI’s comfort zone.
The Scheduled Commercial Bank (SCB) credit growth, which plunged during the COVID-19 pandemic, started recovering after the mid-2021-22. By April 2022, it crossed the 10% mark. The double-digit growth rate not only sustained but accelerated further to 11.5% by 20 May 2022. Details of outstanding SCB credit available till April 2022 show that the improvement in growth seen since the mid of 2021-22 was broad-based.
Year-on-year growth in outstanding credit to the industry accelerated from 2.5% in September 2021 to 8.1% by April 2022.
The growth was dominated by credit to MSMEs, which increased year-on-year by 35.1%, while credit to larger industrial units was up by 1.6%.
Year-on-year growth in outstanding SCB credit to the services sector improved from a meagre 0.8% to 11.1% during this period. This was dominated by lending to non-banking finance companies (NBFCs).
Personal loans grew the fastest, according to CMIE, by 14.6%, as of end-April 2022. Among these, housing loans grew by 13.8% and loans for the purchase of vehicles and consumer durables grew by 11.5% and 64.9%, respectively. Credit card outstanding was up by 20%. Advances against fixed deposits, shares, bonds etc also grew in double-digits as of end-April 2022.
How the Russia-Ukraine War Has Worsened Things
The Russia-Ukraine war clearly has had an adverse impact on India’s Balance of Payment (BOP) position so far.
Global uncertainty has triggered episodes of short-term capital flight across regions, particularly across the developing world, where foreign investors have pulled their money out within a shorter span of time from emerging markets. What this does is create ‘external’ trouble for a given country’s external/foreign debt position (denominated in a foreign currency unit) and for its exchange rate (viz-a-viz the foreign currency its rate is pegged to).
In India’s case, too, its external financial situation has faced a mild shock, witnessing a larger current account deficit (due to a higher import bill) and a larger capital account imbalance seen due to a pullout of foreign investor money from FPIs and FIIs.
The war and the overhanging effect of COVID-19-induced supply chain bottlenecks have hit India’s external sector in two ways.
First, supply disruptions and consequent spurt in global commodity prices have pushed up India’s import bill, thereby widening its current account deficit. Second, the risk aversion among investors triggered by the war and the rise in US treasury rates triggered short-term capital outflows.
A Widening Trade Deficit
India’s current account deficit (CAD) climbed to a 9-year high of $23 billion in the December 2021 quarter. The CAD is estimated to have eased a bit in the March 2022 quarter before shooting up again in the June 2022 quarter. India’s merchandise trade deficit hit an all-time high of $60 billion in the December 2021 quarter, and then eased to $54.2 billion in the March 2022 quarter. Yet, the March quarter trade deficit was at its second-highest since December 2012.
The trade balance worsened in the current fiscal, with May 2022 seeing an all-time high trade deficit of $23.3 billion. Net earnings from services exports improved, but not sufficiently to make up for the enlargement in the merchandise trade deficit.
Two of India’s major sources for current account deficit financing have been foreign direct investments (FDI) and foreign portfolio investments (FPIs). Of these, FDI inflows were strong at $12.8 billion in the March 2022 quarter. The quarter saw a huge flight of FPIs, of the order of $15.7 billion.
Data on FPI activity in the capital market, released by the National Securities Depository Limited (NSDL), as per CMIE records, show that FPIs continued to pull out money from the Indian market in the current fiscal. From 1 April to 13 June this year, they sold Indian equity and debt instruments worth $10.5 billion.
The weakening of India’s external sector performance weighed on its forex reserves kitty and the valuation of the Indian rupee. The rupee depreciated against the US dollar from 75.4 in December 2021 to 76.2 in March 2022, and further down to 77.3 in May 2022. On 13 June 2022, the rupee touched a fresh low of 78.14 against the greenback. It’s touching almost 80 now.
So yes, Sri Lanka’s economic crisis may be quite different in both nature and form to India’s current macroeconomic problems, but India has its own bottlenecks that it must pay attention to.
(Deepanshu Mohan is Associate Professor and Director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University. He is Visiting Professor of Economics to Department of Economics, Carleton University, Ottawa, Canada. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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