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.