Revised fiscal deficit indicates a larger expenditure

By N R Bhanumurthy

Against the expectations, the government has presented a Budget that showed higher fiscal deficit of 9.5% in (RE) FY21 and projected a higher level of 6.8% for (BE) FY22.  The revised fiscal deficit of 9.5% against the budgeted number of 3.5% indicates a larger expenditure especially with improved quality of expenditures as capital outlays have increased significantly compared to the budgeted numbers.  But the most important aspect of these numbers is that of bringing in the off-budget item (food subsidy Bill that was to be paid by NSSF) into the books, which appears to be one of the most positives of this Budget.    Further, the medium-term fiscal deficit target of 4.5% by 2025-26 only suggest that the government may propose a new FRBM roadmap than was suggested by the Finance Commission.

Unlike in the past couple of years, the present Budget appears to be more cautious on the revenue projections and also moderated the nominal GDP growth assumption of 14.4% (Economic Survey projected a nominal GDP growth of 15.4%). With this, the gross tax revenue growth assumed to be at 16.7% intrinsically assuming a lower tax buoyancy of about 1.16, which may be lower given the reforms that are undertaken in both direct and indirect tax policies.  Within the revenues, the Budget expects a historically highest growth in the GST revenues by 22.3%.  This turns to be a buoyancy of 1.55, which appears to be feasible given the simplification measures adopted.  On the other hand, it projects customs revenue at 1.36 lakh crore (with growth of 21.4%) especially when the Budget tries to rationalise the duty structure going forward.  This could be a concern especially many economists suggesting for a lower duties to make Indian industry more competitive in the international markets.

On the disinvestments, this time around there appears to be some increased optimism on the Budgeted numbers (of `1.75 lakh crores against `32,000 crore in RE FY21) especially due to bullish stock market and some of the disinvestment is through IPOs (LIC) and some through privatisation and not just a stake sale.

On the expenditure allocations, the Budget appears to normalise, and rightly so, with the FY20 numbers as FY21 was an abnormal year.  Compared to RE of FY21, in BE FY22, there are reductions in important schemes such as MGNREGS, PMAY, NSAP, and even in the subsidies.   However, there are substantial increase in the other infrastructures such as drinking water supply, highways, metro rail, etc., that have larger multiplier effects.

While there is optimism building up on the fiscal policy side, one concern that remains is on the quality of expenditures proposed for the FY22 while not clear for the next two years.

From Table-1 in the Macroeconomic Framework statement, one may note that the capital account (difference between fiscal deficit and revenue deficit) actually decreases to 1.7% in FY22 (BE) compared to 2% in FY21 (RE).

On the FRBM roadmap, while this is not included in the Budget, it is not clear if the government has brought back the revenue deficit targeting that is eliminated since the 2018 Finance Bill.  The 15th Finance Commission in its report do include all the three targets in its indicative debt & deficit path.  While the comments on the FC suggested FRBM roadmap (which is not expansionary in my view) would be detailed later, there is a need to target revenue deficit as well to have a credible medium term fiscal policy roadmap.

The author is Vice Chancellor, BASE University, Bengaluru