States’ Fiscal deficit to moderate to 4.1% of GDP in FY22.

by mehekkaoberoi

Bасkgrоund:-

  • Fiscal policy, in simple terms, is an estimate of taxation and government spending that impacts the economy.
  • Fiscal policy has a crucial bearing on macro-economic management within the frame of national economic policy and towards the attainment of the objectives of economic growth, equity and financial stability.
  • In India, the sources of fiscal data generally are the Government budget documents and is governed by the system of Legislative Financial Control enshrined in the Constitution of India.
  • This involves an elaborate process of presentation, scrutiny and passing of an Annual Budget and specific Parliament or Legislative approval for Government’s taxation and expenditure proposals. Fiscal accounts are maintained on an elaborate 6-tier system of function-cum-program basis of classification.
  •  Fiscal data are also recast according to the economic and functional grouping of the activities. These are at present comprehensively compiled only in the case of the Central Government. Some State Governments also compile an economic and functional classification of the budgetary data.

Linkаges:- 

  • Ind-Ra estimates the gross market borrowings of states in aggregate will increase to Rs 8.2 lakh crore in FY22. The net market borrowings will be Rs 6.2 lakh crore in FY22.
  • Despite the low base, revenue receipts increased by 1.5 percent in Q1 FY22 over the pre-COVID 19 period of Q1 FY20. This suggests that these states’ revenue collection was unaffected by the second COVID wave’s difficulties.
  • In FY21, overall market borrowings for all states totaled Rs 7.88 lakh crore. States’ overall market borrowing was Rs 1.94 lakh crore in April-July 2021, compared to Rs 2.1 lakh crore in April-July 2020.
  • The agency expects state gross market borrowings to rise to Rs 8.2 lakh crore in FY22, up from Rs 8.4 lakh crore in FY21. In FY22, net market borrowings are expected to be Rs 6.2 lakh crore, up from Rs 6.45 lakh crore in FY21.

Сurrent  Sсenаriо:-

  • India Ratings and Research (Ind-Ra) said on Friday that it expects the country’s aggregate budget deficit to narrow to 4.1 percent of GDP in the current financial year, down from 4.3 percent previously.
  • In FY22, the agency forecasts the aggregate debt/GDP ratio to be 32.4 percent, down from the prior estimate of 34 percent.
  • As a result of a big portion of the population receiving vaccinations, state government revenue receipts are predicted to improve, backed by an economic recovery.
  • As a result, states will loosen limitations on business and commercial activity even more. The agency now estimates the aggregate revenue shortfall of states to be 1.3 percent of GDP in FY22, down from 1.5 percent of GDP previously expected.

Imрасt:-

  • It is found that a long run relationship exists that with the increase in Fiscal deficit, stock market index decreases.
  •  This implies that FD is negatively affecting the stock market index. This is due to the fact that the extent of fiscal deficit and means of financing it, influence the money supply and the interest rate in the economy.
  • High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.
  • India Ratings and Research (Ind-Ra) expects the combined estimate of taxation and spending of states to moderate to 4.1 per cent of the gross domestic product (GDP). The agency’s earlier forecast for FY21 was 9.5 per cent.
  • Evaluating the current situation it is clear that FD and Stock Market have a negative effect. Thus, it can be concluded that the computed the prices of selected stocks is likely to rise in the upcoming period.

Curated by-Meghna.Manoj

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