Infrastructure Push Now, Fiscal Consolidation Later

Context: The Budget has provided reasonable stimulus to growth, but concerns remain about the fiscal deficit.

Positive aspects of Budget 2021-22: In the direction of providing stimulus to growth.

• Step towards transparency: Food subsidies (Rs 2,54,600 crore) given to the Food Corporation of India through National Small Savings Fund (NSSF) loans had transferred on to the Budget.
• Increase in Revenue Expenditure(RE): to 6.7%
• Increase in Capital Expenditure (CE): A budgeted growth of 26.2%.Relative to Gross Domestic Product (GDP), CE is expected to increase from 1.6% in 2019-20 to 2.5% in 2021-22 Budget Estimates (BE).
  • For Infrastructure sector:
    • The increase in CE will help to fund the National Infrastructure Pipeline.
    • A Development Finance Institution (DFI) with an initial capital of ?20,000 crores will serve as a catalyst for facilitating infrastructure investment.
• Receipts Augmentation:
  • Increase in gross tax revenue: of 1.6 for direct taxes and 0.8 for indirect taxes (providing base effect)
  • Increase in non-tax revenue: Budgeted to grow by 15.4% in 2021-22 due to higher dividends from non-departmental undertakings and spectrum sales.
  • Increase in non-debt capital receipts: of 304.3% in 2021-22 due to disinvestment and launching of National Monetisation Pipeline for enhanced asset monetisation.
• Managing Non-Performing Assets (NPAs) of Public Sector Banks: proposed to set up an Asset Reconstruction Company and an Asset Management Company. 
• Accepted Fifteenth Finance Commission’s (FFCs) recommendations: Like -
  • Vertical share of 41% for the States in the shareable pool of central taxes,
  • Revenue deficit grants (scope increased to 17 stated), local body and disaster-related grants.

Concerns that remain

• High-interest payments: interest payments to total revenue receipts will be 45.3%, pre­-empting a significant proportion of revenue receipts.
• Centre-State conflict related to FFC recommendations: Reasons:
  • In determining the grants:
    • The determination of the grants is not based on equalisation principle, although some norms have been used.
    • No clarity about State-specific and sector-specific grants, including performance-based incentives. 
  • Issue of the mode of transfers in terms of general-purpose unconditional transfers’ vis-à-visspecific purpose and conditional transfers. 
  • Imposition of cesses by the Centre: This reduced the shareable pool, and as a result, States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).

Way forward: Deficit financing seems to be essential for providing stimulus to growth, but we must also be conscious of the burden of the rising stock of debt.

• Implement FFC recommendations:
  • Revise the fiscal consolidation road map for the Centre and States:
  • Re-examine the fiscal responsibility legislations of the Centre and States: By setting up a High-Powered Intergovernmental Group.
  • Take fiscal deficit to 4.5% of GDP by 2025-26. 
• Need a transparent auction process to facilitate suitable price discovery for disinvestment.
• Re-examine the issue of debt sustainability: By taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.
  • Direction of Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts.