What Explains the Budget’s Fiscal Stance

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