Balance the fisc?

When Union finance minister Nirmala Sitharaman presented the 2020-21 Union Budget last year, she announced that the Revised Estimate (RE) for the 2019-20 fiscal deficit would be 3.8% of GDP, 50 basis points higher than the Budget Estimate (BE) of 3.3%. It was seen as an undesirable development by the markets.

The BSE Sensex fell by 2.4% on February 1, 2020. Sitharaman pegged the 2021-22 fiscal deficit at 3.5% of Gross Domestic Product (GDP). Then the pandemic struck, making budgetary calculations completely irrelevant.

Not only has the fiscal deficit reached an all-time high of 9.5% of GDP in 2020-21,as per the Revised Estimates (RE) given in the 2021-22 budget, it is not expected to come down anytime soon. Sitharaman said in her budget speech on Monday that she expects the fiscal deficit to come down to 4.5% by 2025-26.

In normal times, this would have created a huge uproar. But these are not normal times, and the BSE Sensex endorsed the fiscal deviation, which is crucial for growth, by rising 5% on budget day.

It is useful to understand how the government’s fiscal math changed during and after the pandemic, and the assumption behind the 2021-22 Budget Estimate (BE).

India’s absolute fiscal deficit almost doubled from ₹9.3 lakh crore in 2019-20 to ₹19.5 lakh crore 2020-21 (RE). When compared to the 2020-21 BE numbers, the 2020-21 RE fiscal deficit has increased by 2.3 times. To be sure, this is not the additional government spending during the pandemic.

Total central government spending increased 1.3 times from ₹26.9 lakh crore in 2019-20 to ₹34.5 lakh crore in 2020-21 (RE). When compared to the BE figure of ₹30.4 lakh crore for 2020-21, the increase was 13.5%.

The rest of the increase in fiscal deficit can be attributed to two factors. The first is the fall in nominal GDP in 2020-21 , a contraction of 4.4%.

With the denominator going down, the fiscal deficit as a percentage of GDP can increase for the same amount of absolute deficit. The other big reason for an increase in the fiscal deficit is a sharp fall in revenue collections, the biggest components of the three receipt items – revenue receipts, recovery of loans and other receipts (disinvestment). These three are subtracted from the government’s total spending to calculate the fiscal deficit.

Revenue receipts, as per RE figures, fell short of the 2020-21 BE numbers by more than ₹4.6 lakh crore. Disinvestment income is expected to be just ₹32,000 crore (RE) against the BE target of ₹2.1 lakh crore.

How is the fiscal math going to change in the next fiscal year?

There is not much of a difference between the 2021-22 BE numbers with the 2020-21 RE numbers. The central government has retained spending at the levels seen during the pandemic. It also does not expect much of a revival in revenue receipts. The 2021-22 BE figure of ₹17.9 lakh crore is lower than the 2020-21 BE projection of ₹20.2 lakh crore.

A disinvestment target of ₹1.75 lakh crore for 2021-22 (BE), when read with the ₹2.1 lakh crore target in 2020-21 (BE) and a realisation of just ₹32,000 crore (RE) means that the government will try to accomplish in the next fiscal year, what it started in 2020-21. Given the fact that the government has announced disinvestment of a general insurance company and a public sector bank — neither was on the cards earlier — this also suggests a moderation in expectations of disinvestment income.

How realistic are the fiscal deficit calculations for 2021-22?

The core assumption behind fiscal calculations, especially when there are no major changes in tax slabs, is the projected nominal GDP growth.

Taxes, after all, are a fraction of nominal GDP. By assuming 14.4% nominal GDP growth in 2021-22, one percentage point less than what the Economic Survey said it will be, Budget 2021-22 seems to have taken a conservative approach.

Finance minister Niramala Sitharaman admitted as much in an interview, saying that the finance ministry has been “reasonable... in assessing” what it can do.

Most importantly, Union Budget 2021-22 has won a lot of praise for bringing a lot of off-budgetary spending back into the budget calculations.

The biggest manifestation of this is the allocation for subsidy to the Food Corporation of India under the National Food Security Act from ₹77,983 crore in 2020-21 (BE) to ₹3.4 lakh crore in 2020-21 (RE) and ₹2 lakh crore in 2021-22 (BE). The higher fiscal deficit numbers, going forward, need to be seen in this context as well.