The Budget Got its Growth Focus Right but Challenges Still Remain

Context: While the budget 2021 has moved away from the Fiscal Responsibility and Budget Management (FRBM) path by as much as 3.8 percentage points for the next fiscal, it also poses certain challenges.

Features of Union budget 2021-22:

• Fiscal consolidation: Fiscal deficit target set to 4.5% of GDP by 2025-26 from 6.8% in 2021-22.
  • The deficit levels look worse for a good reason – as the budget relies less on line/off-budget items for funding investment and more on direct capital expenditure.
  • Puts an end to the practice of funding the Food Corporation of India’s shortfall via borrowings from the National Small Savings Fund and replaces it with budgetary allocation.
  • Growth predicated on the States: to follow a counter-cyclical fiscal policy too as they account for 58% of overall government spending and 63% of government capital expenditure.
• Increased Capital Expenditure: of 26% over last fiscal’s revised estimate.
  • Public investment has a multiplier effect (greater than consumption): a recent International Monetary Fund study shows that positive effects of public investment only amplify during periods of uncertainty.
  • Private sector investments are expected to lead a revival: Despite low overall capacity utilization rates, private sector investment, particularly by large corporates, should be the first to pick up.

Associated concerns:

• Revenue underperformance: as revenue depends on the gross domestic product (GDP), which will take time to normalize. (Gross tax revenues are estimated at about 30% below trend value)
• Role of exogenous/luck factors:
  • Oil prices: expected to rise to an average of $53 per barrel in 2021 from $42.3 in 2020.
  • Monsoon: need to be closely tracked as India has seen more than two consecutive years of normal monsoon (as we now have) only once in the past two decades.
    • Any abnormality will have some bearing on GDP growth as well as rural spending.
• Declining investment: as a percentage of GDP, it fell to 29.8% in 2019-20 from 34.3% in 2011-12 and estimated to be at 27.6% this fiscal.
• Rising bond yield: may be further impacted due to huge borrowing programme of ?12 trillion and an influx of state development bonds can also be expected as state deficits widen.

Way forward:

• Ensure revenue performance: to achieve fiscal targets.
• The Reserve Bank of India (Mint Road): should keep the Centre’s (North Block’s) outsized borrowings from pushing up the cost of credit in India.