Announce a fiscal boost
The economy must not suffer due to lack of demand. Boost spending
The importance of Union budgets has decreased over time in India for three broad reasons. With the private sector’s growing footprint, the size of budgetary spending vis-a-vis India’s GDP has gone down. The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 puts limits on the deficit the government can run. And the roll-out of the Goods and Services Tax (GST) regime in 2017 has taken the bulk of indirect tax decisions, and hence prices in the economy, out of the budget’s purview. Given these limitations, what should one expect from the budget? This can be summarised in one phrase — it should err on the side of counter-cyclical caution.
The Economic Survey 2020-21 has set the context. It asserts that India is experiencing a V-shaped economic recovery. This suggests that not only is the worst over, the economy has come out of the pandemic’s shock without any long-term scars. The Survey also lays the ideological ground for justifying a fiscal stimulus — it makes a case that India’s debt is sustainable, rating agencies have been unfair in downgrading India, and government investments crowd in private investment. Whether or not the budget exploits the Survey’s ideological groundwork will be evident from the actual spending boost, and not the rise in fiscal deficit, it announces. Even if government spending remains unchanged, and government receipts dip due to fall in incomes, the fiscal deficit will go up. This is what has happened in India’s past few budgets. Revenue projections did not materialise because they were built on over-optimistic GDP growth assumptions.The economy was slowing then. It has experienced a contraction now.
While some high-frequency indicators do suggest a strong sequential recovery, there isn’t enough data at the moment to conclude that the economy — at least the informal stakeholders in it — has not suffered serious damage. There is enough evidence to suggest that some sectors have suffered more than others, with vulnerable citizens having borne the brunt of the contraction. India has been lucky to have escaped, at least until now, a second wave of infections. As the vaccination drive intensifies, the economy will inch back to normal but it must not suffer due to lack of demand. This is exactly why the budget should err on the side of caution, and announce a massive fiscal boost.