MASSIVE FISCAL DEFICIT DRAGGED BY COVID-19 : EYE OPENER TO REINSTATE PUBLIC RELIEF MEASURES
MASSIVE FISCAL DEFICIT DRAGGED BY COVID-19 : EYE OPENER TO REINSTATE PUBLIC RELIEF MEASURES
Globally, the Covid-19 Pandemic has dragged the Fiscal Deficit of the Nations hay ware derailing the budgetary provisions, the magnitude is directly co-related to who kept how much economic activities going on and how much under lock down. Understanding Fiscal deficit is easy, fiscal deficit is basically the income minus expenditure of the National Government and is a terminology having same meaning across the world without ambiguity. When fiscal deficit is in negative mark, it means the government has done more expenditure than it could earn by revenue from its operations. The revenue or income of the government is primarily from direct taxes ( income tax or wealth tax or any such taxes levied from and paid by citizens to the government directly ) and indirect taxes ( are taxes and levies that are charged to the businesses of goods and services which either the businesses pay themselves or collect from citizens and pay to governments - in effect collected from citizens indirectly ). When the Fiscal Deficit is very wide(large) a figure, it could be in terms of % of GDP (size of GDP considered) or an absolute figure in monetary value, it means either the government expenditure is more or the income is less or both happening depending on National situation. When both events are in vogue (income is low and expenditure is more) the fiscal deficit is much wide and it indicates that the economy is in bad shape and in serious trouble. During Covid-19 lock down, both events were in vogue. When fiscal deficit is wide, where does/did the Nation get the money to make higher expenditure? It means the National Government has gone for borrowing the extra money. From where has it borrowed? The possibility of sources could be its own Central Bank, Local Public market or from external lending institutions (other nations, IMF/World Bank or other international multilateral lenders). But, in most of cases, while the Covid-19 has affected almost every country, borrowing from international lending sources is almost nil. Therefore, the fiscal deficits in this case have been financed by own country Central Banks against Sovereign (Government) guarantees in any form. How does and where from the Central Bank got the money to finance such wide fiscal deficit? The Central Banks are custodians of National monetary resources and policies under specific laws. They have their reserves and they are mandated to print/mint currency as per national need. Thus, they can finance from their reserves or by printing currency against Government guarantees and securities. I have a post, here, I have posted earlier wherein I have postulated that the National governments globally will have to resort to printing lot of currencies in order to sustain and revive economies, during/post-Covid-19. My postulations would stand to be true given the huge fiscal deficit figures have been published now.
The fiscal deficit figures of India published a day back are worth considering. In the first four months of fiscal year 2020-21 (Indian fiscal year is April-March) meaning from April 2020 to July 2020, India has a huge fiscal deficit of Rs 820000 Crores (or Rs 8200 billion or USD 111.7 billion). The Government had total revenue receipts of Rs 227000 Crores while its expenditure stood at Rs 1050000 Crores. (consider a Crore =10mllion and 1USD = Rs 70 for conversion). This wide fiscal deficit is due to almost total freeze of economic activities under lock down and the compulsive expenditure the Government had to make to combat Covid-19 while revenue receipts are meager under such condition.
The matter reflects in simple terms, if the Government has not earned the people have not earned. The Government can borrow from the own Central Bank who can even print currency and finance the fiscal deficit, then from where the people can borrow to finance their own expenditure if the Banks and Financial institutions are sitting tight holding funds in fear and bulldozing the RBI ( Reserve Bank of India ) and the Government arguing against the moratorium relief given to the suffering public. Again, CIBIL and other such ratings are being used as undue repellants (or blocking tools) for credit movement. When the Banks and Financial institutions are sitting tight in fear and not lending normally, and garbage tools (it’s garbage and has no meaning when Covid-19 is prevalent and considered) like CIBIL data is blocking lending, how will the borrowers be able to repay unless economic activities are revived to normal level. Therefore, it is unfair on the part of the Banks and Financial institutions not to understand the total situations and crying foul to push the Government and RBI to withdraw the moratorium relief measures on undue grounds. Also, the Banks and Financial institutions would be unfair to load the borrowers with undue interest rate (compounding or penal interest rate) during the lock down. If a waver of interest in full/part can be provided with control on the interest rate to be applied, if has to be charged without having any other choice, then it has to be done at a fixed rate that should be controlled by the regulator (RBI) to check deviation.
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