A Time To Spend

Context: Budget’s fiscal consolidation strategy, compressing expenditure, could prove to be a costly miscalculation.

Provision related to expenditure in the Budget 2021-22

• Rise in the Centre’s total expenditure by Rs 4.08 lakh crore over its earlier estimate.
  • Includes higher subsidy pay-outs, along with higher spending on MGNREGA.
  • Total subsidy pay-out – Rs 2.1 Lakh crores (including Rs 1.5 Lakh crores for food subsidy payment to the Food Corporation of India and Rs 62,000 for clearing fertilizer subsidy).
• Relaxed fiscal consolidation roadmap: 4.5% by 2025-26 for Union government; is good as to contain effects of the pandemic over the years will require higher government spending.

Associated concerns: with the proposed fiscal consolidation.

• Poor economic growth: demands for higher spending if the government expects to meet its target of 8% growth by 2025-26.
  • Nominal GDP growth is expected to slow down from 13.5% in 2021-22 to 9.5% in 2022-23. (According to the 15th Finance Commission)
  • The second-round effects of job and income losses and weak balance sheets increase the problems.
• Lack of demand-side stimulus: Huge subsidy payments are for goods already consumed.
  • Excluding these payments, the government-expenditure-to-GDP ratio works to around 16.6% for 2020-21.
  • Spending to GDP ratio has fallen to 15.6% in 2021-22.
  • Higher spending to finance revenue: By 2025-26, 60-70% of the union government’s borrowings are expected to be used for it and not for capital expenditure.
• Lack of relaxed consolidation for states: 
  • They are expected to bring down their deficits to 2.8% of GDP by 2023-24 from 4.2% in 2020-21.
  • They are expected to run a revenue surplus of 2.4% of GDP by 2025-26.
  • Effectively, states will be allocating around 5.2% of GDP on capital expenditure.

Conclusion: Few would have faulted governments for spending more to counter-balance the effects of a once-in-a-century crisis. There is a time for aggressive consolidation.