In shadow of pandemic, Centre hikes capital, revenue spending
The fiscal deficit will be 6.8% of GDP in 2021-22 and is expected to come down to 4.5% only by the year 2025-26
NEW DELHI: India, like the rest of the world, experienced an unprecedented economic disruption because of the Covid-19 pandemic, just a month-and-ahalf after the 2020-21 Budget was presented in Parliament.
With the nation under an almost complete lockdown for 68 days and the subsequent economic contraction, the sanctity of the 2020-21 Budget numbers was seriously jeopardized.
The 2021-22 Budget numbers have confirmed that expectation; 2020-21 will be the year in which India ran up its highest ever fiscal deficit, an estimated 9.5% of gross domestic product (GDP). The pandemic has also led to a long-term deviation from the fiscal consolidation path proposed by the Fiscal Responsibility and Budgetary Management (FRBM) Act of
2003. The fiscal deficit will be 6.8% of GDP in 2021-22 and is expected to come down to 4.5% only by 2025-26.
That equity markets jumped 5% on Monday, the fourth highest on a Budget day despite this year’s fiscal deficit increasing by six percentage points over 2020-21 projections underlines the fact that this is not a normal budget.
Fiscal consolidation has been given the go-by, but it is important to understand the macroeconomic method behind this process.
Spending did not go down despite a sharp fall in revenue in 2020-21. Gross Tax Revenues, according to the 2020-21 Revised Estimate (RE), are 22% lower than the ₹24.2 lakh crore Budget Estimate (BE) for the current fiscal year.
Central government spending, according to the 2020-21 RE figures; however, is 13% more than the ₹30.42 lakh crore BE number for 2020-21. The government did not make an either-or choice in spending during the pandemic year. Both revenue and capital spending have risen compared to the 2020-21 BE numbers.
The next fiscal year will see a change in fiscal approach. Total central government spending will see a small increase from 2020-21 RE to 2021-22 BE figures. But the government has also prioritised its spending. While revenue spending will see a reduction compared to the 2020-21 RE numbers, capital spending is expected to increase sharply and reach the highest ever share of 15.9% in total central government expenditure. The government is clearly banking on the fact that a capital spending push will help rejuvenate growth in the economy. It needs to be underlined that the Budget has projected nominal GDP growth of 14.4%, a percentage point less than the 15.4% predicted by the Economic Survey.
The government has also taken a calculated risk in making its spending plans for the next fiscal year. The Budget has announced a sharp roll back in welfare spending. Allocations for the Mahatma Gandhi National Rural Employment Guarantee Scheme, food subsidy and other schemes have been reduced sharply. This means that the government is hoping that the ongoing recovery in the economy will take care of the headwinds generated by withdrawal of such stimulus. Given the fact that the Budget has not announced any direct boost to demand, this risk is significant.
“The Union Budget 2021-2022 takes a sharp turn from the general fiscally prudent approach followed by the present government to a much more aggressive growth-oriented approach. Even as the government grappled with Covid related costs in FY21, it still chose to increase capital expenditure, which has raised the fiscal deficit to a massive 9.5% of GDP in FY21,” Prabhat Awasthi, managing director and country head for India at Nomura, said in a statement. “The FY22 budget underlines this commitment to growth even more clearly and is heavily investment-oriented as the government has budgeted a 26% increase in capital expenditure.”