Recalibrate Growth, Reprioritise Expenditures

Context: Protecting total expenditures at budgeted level and mass vaccination are important amid pandemic.

Covid-19 induced economic erosion

• Decline in expected nominal GDP growth: The International Monetary Fund (IMF), the Reserve Bank of India (RBI), and the Economic Survey had forecast real GDP growth for 2021­22 at 12.5%, 10.5%, and 11.0%, respectively.
  • However, Moody’s has recently projected India’s GDP growth in 2021­ 22 at 9.3%.
  • This is close to the benchmark growth rate of 8.7%, which would keep India’s GDP at 2011­12 prices at the same level as in 2019­20.
  • At 8.7% real growth, the nominal GDP growth would be close to 13.5%, assuming an inflation rate of 4.5%. This would be lower than the nominal growth of 14.4% assumed in the Union Budget.
• Shortfall in Gross Tax Revenues (GTR):
  • With optimistic tax buoyancy of 1.2, lower nominal GDP growth would imply a GTR growth of 15.7% as compared to the budgeted growth of 16.7%.
  • With an average tax buoyance of 0.9, the nominal growth of GTR would be 12.2%, and corresponding shortfall in the revenues is estimated to be about Rs.0.6 lakh crore.
• Shortfall in non-tax revenues: Budgeted magnitudes for non-tax revenues and non-debt capital receipts at Rs 2.4-lakh crore and Rs 1.9-lakh crore, expecting growth rates of 15.4% and 304.3%.
  • However, the non-tax revenues are expected to decline due to Covid disruptions in the ambitious asset monetisation and disinvestment programme.
  • Also, the budgeted growth was premised on communication services (60%) and dividends and profits from non­-departmental undertakings (44.1%).
  • Therefore, a shortfall of Rs.1.5­lakh crore in non­tax revenues and non-­debt capital receipts together may not be ruled out.
• Impact on fiscal deficit:
  • Two factors will affect the fiscal deficit estimate of 6.76% of GDP in 2021-­22 and may lead to a fiscal slippage close to 7.7% of GDP in 2021¬22.
    • First, there would be a change in the budgeted nominal GDP growth.
    • Second, there would be a shortfall in the receipts from tax, non­tax and non­debt sources.
  • Protecting total expenditures at the budgeted level is, however, important given the need to support the economy in these challenging times.

Way Forward:

• Increasing the budget for health: 2021-­22 Budget has provided for Rs.71,269 crore, which is lower than 2020-21 Budget Rs.78,866, implying a fall of Rs.7597 crores.
  • Construction activities within the health sector will have high multipliers.
  • Higher expenditure can be directed on inducting a larger workforce of doctors, nurses and paramedics and other hospital-­related administrative staff.
  • Speedy and larger vaccination coverage of the vulnerable population is key to minimising economic damage (At an average price of Rs.300 per dose, for age 12+, it requires Rs.65,108 crores.)
    • COVID­19 vaccination is characterised by strong inter-­State positive externalities, making it primarily the responsibility of the central government.
    • Thus, the entire vaccination bill should be borne by the central government; the economies of scale and the Centre’s bargaining power would keep the average vaccine price low.