Gives a push to capex while easing fiscal consolidation
Based on the recommendations of the Fifteenth Finance Commission, the Central government has agreed to amend the FRBM Act. The deficit and debt targets of the existing Act have been rendered irrelevant due to the impact of the pandemic and the longer-term erosion of tax and non-tax revenues relative to GDP. Given these economic realities, the Central government has substantially raised its fiscal deficit-to-GDP ratio for the period 2020-21 (RE) to 2025-26.
Thrust on infrastructure
Thus, the real thrust of the Budget is on increasing capital expenditure, focussed on expanding physical infrastructure in line with the already envisaged National Infrastructure Pipeline (NIP). Increasing capital expenditure is desirable since it has high growth and employment multipliers.
The budgeted increase in revenue expenditure in 2020-21 may include an accounting adjustment by bringing on Budget, the subsidies earlier given to the Food Corporation of India through the National Small Savings Fund (NSSF). This is why in 2020-21 (RE), the estimated food subsidy shoots up to ₹4,22,618 crore from ₹1,08,688 crore in 2019-20. It falls again to ₹2,42,836 crore in 2021-22 (BE). While this is a welcome move in the interest of transparency, it may not reflect any actual substantive increase in government’s revenue expenditures.
The emphasis on capital expenditure has enabled the government to increase the capital expenditure relative to GDP from 1.6 per cent in 2019-20 to 2.3 per cent in 2020-21 (RE) and further to 2.5 per cent in 2021-22 (BE). However, there is no significant improvement in the quality of fiscal deficit as measured by the share of revenue deficit in fiscal deficit which has deteriorated from 70 per cent in 2018-19 to nearly 79 per cent in 2020-21 (RE) and close to 75 per cent in 2021-22 (BE).
For financing the proposed increase in capital expenditure, major initiatives are being undertaken for monetising government and public sector owned assets and reinvigorating the disinvestment programme. For asset monetisation, a National Monetization Pipeline is being launched. A massive increase in disinvestment receipts has also been budgeted, raising its level to ₹1.75 lakh crore in 2021-22 from ₹32,000 crore in 2020-21 (RE), implying an increase of 447 per cent. While no significant tax revenue changes have not been introduced, reliance has been based on normal GDP growth and buoyancy assumptions.
Realising an assumed nominal GDP growth of 14.4 per cent and a buoyancy of 1.2, implying a growth of 16.7 per cent in Centre’s gross tax revenues, would be key to maintaining a fiscal deficit-to-GDP ratio of 6.8 per cent in 2021-22. Slippage in these parameters may push up the Centre’s fiscal deficit above 7 per cent of GDP. Both growth and tax buoyancy are contingent upon economic conditions remaining unaffected by a second round of Covid-19 which is being faced by many countries.
Based on the recommendations of the Fifteenth Finance Commission, the fiscal consolidation paths of the Central and State governments have been revised. In the case of the central government, the Centre’s fiscal deficit-to-GDP ratio is being targeted to be reduced from a level of 9.5 per cent in 2020-21 (RE) to 4.5 per cent in 2025-26 in graduated steps. For the state governments, it is being targeted to be reduced to 3 per cent of GDP by 2023-24. The Commission has proposed the setting up of a High-Powered Intergovernmental Group to examine the debt and deficit sustainability framework and amend the existing FRBM Act accordingly. One of the key issues that such a body may be required to address is to consider whether the fiscal consolidation roadmap should be asymmetric between the Central and State governments. With the Central government being allowed to borrow more than the State governments up to 2025-26, such an asymmetry is already being implemented through the Centre’s 2021-22 Budget.
The writer is Chief Policy Advisor, EY India. Views are personal