Context: Although the budgetary exercise has made a virtue out of necessity, the change in fiscal stance could hamper debt sustainability.
Arguments in Favour of Relaxing Fiscal Deficit Targets
Rise in Capital Expenditure (CAPEX): (to finance revenue deficits) by 31% in FY21 revised estimates.
Assured debt sustainability: Economic Survey argues that, in high growth economies such as India, the usual arguments about the sustainability of public debt do not apply.
Expenditure at high multiplier areas (infrastructure) will not crowd out of private investment and will reduce the fiscal deficit.
Unsuitability of old fiscal limits: in a new economic scenario of rising tax-GDP ratio, thought to be the key to fiscal sustainability.
Emphasis on privatization and not disinvestment: privatization is intended to earn revenues for the government and will improve the efficiency of assets resources.
Arguments against Relaxing Fiscal Deficit Targets
Shortfall in revenues: (at 4.65 trillion) on the base of revenues for FY21, containing the deficit for FY22 at lower than 6.8% would have required an increase in taxes and a cut in expenditure.
Increase in CAPEX is an “optical illusion”: in actual terms, CAPEX rises by a mere 3.6% if we exclude contribution of following items-
Special loan (Rs 79, 398 crores) to provide liquidity to railways (qualifies as revenue expenditure).
Loan to states (Rs 12,000 crore).
Against the recommendations of 15th Finance Commission: due to following reasons -
Large contingent liabilities (Central and state governments) and external shocks like oil shocks, global financial crisis and pandemic can derail growth.
Differential treatment of rating agencies towards advanced and emerging markets in respect of the public debt.
Declining tax/GDP ratio: will compel government to look to non-tax revenues to finance expenditure.
Centre´s tax/GDP ratio fell to 10.6% (from 11.9% ) in FY20 and is estimated at 9.8 and 9.9% in FY21 and FY22, respectively.
Infeasibility of large scale privatization: distress sale of assets through improperly designed and executed privatization will result in inefficient utilization of assets to finance budgetary deficits.
Privatization drive will attract opposition from political parties and unions