Growth Compulsions, Fiscal Arithmetic

Context: The economic situation warrants enhanced government expenditure; the policy challenge is to minimize the growth fall.

Challenge of risky economic indicators:

• Decline in Gross Domestic Production (GDP): India’s growth in the first quarter of 2021-21 at (-) 23.9% showed one of the highest contractions globally.

• The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8% (the Reserve Bank of India’s Survey of Professional Forecasters) to (-) 14.8% (Goldman Sachs). 
• The Organisation for Economic Cooperation and Development (OECD) in its September 2020 Interim Economic Outlook has projected a contraction of (-) 10.2% in FY21 for India. 
• Lack of fiscal stimulus: Contraction in the ‘Public Administration, Defence and other Services’ by (-) 10.3% suggests that there was no fiscal stimulus.

• High inflation: 

• The latest data released by the Ministry of Statistics indicate a Consumer Price Index (CPI) in?ation rate of 6.7% for August 2020. 
• Since deflator based in?ation tends to be lower than the CPI in?ation, it may be about 5% or less. 

• Revenue Erosion: 

• In the ?rst quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6%.
• The Comptroller and Auditor General (CAG) data of 19 States show a contraction of (-) 45% in their tax revenues.
• This implies Negative Buoyancy of about 1.65 in the combined central and State government taxes.

• High Fiscal Deficit: For the central government to maintain the level of budget expenditure and also provide for additional stimulus, the fiscal deficit has to be increased to 8.8% of the GDP.

• If the combined deficit of the Centre and the States are included along with the Goods and Service Tax compensation shortfall, the deficit may rise to 17.4% of the GDP.
• The Centre’s ?scal during the ?rst four months of 2020-21 as a percent of the annual budgeted target was at 103.1%. 

• Limit to the fiscal deficit: 

• There are not adequate resources to support a ?scal de?cit of nearly 14% of GDP. 
• Direct monetization by the Reserve Bank of India may lead to high inflation.

Conclusion: Government expenditure is the right approach to finance the combined deficit of the Centre, and the states must be pursued, It may take several years of normalization.