Gauging recovery through the Pre-Covid lens : ICRA study

Gauging recovery through the Pre-Covid lens : ICRA study

The warped foundation created by last year's restricted statewide lockdown masked the obstacles posed by Covid-19's second wave in India in Q1 FY2022. As a result, India's real GDP rose at a record rate of 20.1% year on year (YoY) in Q1 FY2022, despite the low base. However, the second wave had a significant 9.2% compression on India's real GDP in comparison to the pre-Covid level. The warped foundation created by last year's restricted statewide lockdown masked the obstacles posed by Covid-19's second wave in India in Q1 FY2022. As a result, India's real GDP rose at a record rate of 20.1% year on year (YoY) in Q1 FY2022, despite the low base. However, the second wave had a significant 9.2% compression on India's real GDP in comparison to the pre-Covid level.

Private consumption and investment lagged below their pre-Covid levels by 11% and 17%, respectively, in Q1 FY2022. While farm demand remained stable following a succession of excellent harvests, the loss of work and income in large swaths of the rural and urban non-farm economy, as well as increasing medical and gasoline costs, all contributed to the overall compression on private spending.

The private sector put investment plans on hold during the second wave, despite the fact that government capex performed better, particularly in the case of the Government of India (GoI).

Furthermore, in Q1 FY2022, government consumption expenditure exceeded the pre-Covid level by a healthy 7.4%. Revenue expenditure by the Government of India increased by 7.8% to Rs. 7.1 trillion in Q1 FY2022 from Rs. 6.6 trillion in Q1 FY2020, primarily due to non-subsidy expenditures. Additionally, its capital expenditure nearly doubled to Rs. 1.1 trillion, up from Rs. 0.6 trillion during the Parliamentary elections and model code of conduct period.

Despite this, the Government of India's fiscal deficit decreased to a small Rs. 2.7 trillion from Rs. 4.3 trillion pre-Covid. This came as a result of the company's revenue receipts increasing to Rs. 5.4 trillion from Rs. 2.8 trillion. Gross tax receipts increased by Rs. 1.3 trillion during the same time, owing primarily to increases in corporation tax, personal income tax, and excise duty collections.

The significant increase in direct tax receipts of 47% contrasts with a 10.3% fall in non-agri GVA in Q1 FY2022, compared to Q1 FY2020. A reasonable conclusion is that the formal/tax-paying segment of the non-agricultural sector has benefited at the expense of the remainder.

The Comptroller and Auditor General (CAG) has released fiscal data for the first quarter of FY2022 for 19 state governments. Their revenue spending jumped by a significant 14% to Rs. 4.9 trillion in Q1 FY2022, compared to Rs. 4.3 trillion pre-Covid, presumably reflecting increased social sector spending during the second wave of Covid-19. Their capital expenditure also topped pre-pandemic levels of Rs. 0.6 trillion in Q1 FY2020, albeit only by a modest 2.6%.

However, in contrast to the reduction in the Government of India's fiscal deficit, the aggregate fiscal deficit of the 19 states virtually doubled to Rs. 1.1 trillion in Q1 FY2022 from Rs. 0.6 trillion in Q1 FY2020 prior to Covid. This is because aggregate state revenue receipts were just 2.0% higher in that quarter than the pre-Covid level of Rs. 4.3 trillion. State-level taxes, which are mostly indirect in nature, and central government tax devolution fell short of the level seen in Q1 FY2020.

The fall in state-level tax receipts is largely consistent with the contraction in private consumption in India in Q1 FY2022 relative to pre-Covid levels. Despite attractive home loan rates and stamp duty rate reductions in some of the sample states, S&R collections in Q1 FY2022 were a significant 21.3% lower than pre-Covid levels, demonstrating the pandemic's ongoing impact on state budgets.

Similarly, excise duty collections in Q1 FY2022 were a moderate 3.6% lower than in Q1 FY2020, as localised restrictions dampened consumption in the current fiscal year's first quarter.

Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Nagaland, Odisha, Punjab, Rajasthan, Sikkim, Tamil Nadu, Telangana, Tripura, Uttar Pradesh, and Uttarakhand are among the 19 state governments included in ICRA's sample.