The expectations were running high, but finance minister (FM) Nirmala Sitharaman had to strike a delicate balance between fiscal expansionism and fiscal prudence in Budget 2021-22. Nobody denies that the economy needs a strong booster shot with growth at a historical low, amid Covid-19. However, excessive borrowing this year in times of uncertainty would have curtailed the room for the government to address this evolving situation in the future.
The most critical number in the budget —- fiscal deficit for FY21-22 —- stands at 6.8% of the Gross Domestic Product (GDP), a sharp decrease from the 9.5% estimated for FY20-21. Even before the pandemic struck India, government borrowings were already in the shaky territory – the actual fiscal deficit for 2019-20 was 4.6% of GDP, the highest since 2012-13, reflecting the precarious nature of public finances.
In keeping with the Fiscal Responsibility and Budget Management Act, 2003, (FRBM), the path for consolidation outlined in last year’s budget would have cut fiscal deficit to 3.1% of GDP and eliminated the primary deficit (borrowings excluding expenses on interest payments) by 2022-23. But Covid-19 derailed that plan.
The government has made no projections for 2022-23 and 2023-24 due to an impending amendment to the FBRM Act. However, FM said that the Centre’s fiscal deficit will be brought down to below 4.5% of GDP by 2025-26. Clearly, a gentler path towards fiscal consolidation is being planned. This is a positive sign in uncertain times.
Another central feature of this year’s budget is the paltry increase in government expenditure. The Centre’s outlays will increase by less than 1% over (the historically high) the revised estimates of 2020-21. This suggests that much of the heavy-lifting in fiscal policy is either behind us or limited to the next three months with an over 13% increase in revised expenditure over the budgetary figures for 2020-21.
However, this 13% boost deserves a closer look. The government will spend an additional ₹3 lakh crore on food subsidy for the poor in 2020-21, making up almost 75% of the ₹4 lakh crore-gap between budgeted and estimated expenditures in the pandemic year. Although automatic stabilisers played a crucial role in countercyclical fiscal policy –government expenditure didn’t fall even while revenues dried up – where is the other stimulus spending promised in the several mini-budgets last year?
There are some welcome changes announced in the quality of government expenditure. Almost 80% of borrowings in 2020-21 were undertaken to finance deficit on the revenue account. If the budgetary estimates hold, this will fall to about three-fourths in 2021-22. This government has made capital spending a centrepiece of its vision for India – the gross budgetary support for asset creation will climb to almost 2.5% of GDP, making up 16% of all government outlays. This is a significant boost from the average CAPEX of 1.7% of GDP from 2011-19.
Many will ask whether the actual fiscal deficit is likely to be within the ballpark of the budgetary estimates. A lot will rely on success in meeting disinvestment targets.
Except for two years in the past decade (2017-19), realised disinvestment receipts have been consistently lower than what was budgeted for. Worryingly, this gap exacerbated in the last two financial years, with collections for 2019-20 being half of budgetary estimates and only 15% in 2020-21. This year, the government hopes to collect ₹1.75 lakh crore – a record figure – but progress on Air India’s sale gives hope.
On the tax front, no significant changes in rates on personal income were announced. Thankfully, the rumours of a Covid-19 cess or a higher surcharge – a hare-brained idea during a recession – remained just that.
However, as is usual, the budget relies on optimistic targets for tax collection. It works with the assumption of 14.4% nominal GDP growth, causing a 17% spike in tax revenues. The implied buoyancy of gross tax revenue – increase in tax collection if income grows by 1% – is a bit higher than historical averages computed by the Reserve Bank of India. Thus, actual deficit might be considerably more than what is projected in the Budget. If the long-term estimates for buoyancy hold in 2021-22, the Centre’s kitty will shrink by ₹67,000 crore from what is budgeted for corporate and income taxes alone.
To borrow the chief economic adviser’s analogy, this is not a big-bang Rishabh Pant budget, although that doesn’t mean it is bad. Particularly impressive is the keenness showed by FM in imparting integrity to fiscal numbers. Phasing out opaque extra-budgetary borrowings deserves our full compliments.
Rising capital expenditure is a welcome sign too –RBI estimates that each rupee spent on creating long-term assets adds over seven times as much to GDP compared to expenditure on current items like subsidies and salaries.
Finally, an unhurried move towards fiscal consolidation and the cushion of a 60-time bigger contingency fund suggests that the government is balancing caution with a willingness to do more in the future if required.
In that, Nirmala Sitharaman might have borrowed a leaf out of Pujara’s notebook.
Sarthak Agrawal is an economist from the University of Oxford, and previously a researcher at the London-based Institute for Fiscal Studies
The views expressed are personal