Deficit slippage not to stoke inflation: DEA secretary

The Centre’s decision to keep its fiscal deficit at an elevated level of 6.8% of GDP in FY22 is unlikely to stoke much inflationary pressure, as the government will deploy much of the additional resources in creating productive assets, economic affairs secretary Tarun Bajaj told FE.

Moreover, with capacity utilisation trailing the trend level in the wake of Covid-induced disruptions, even the supply side is unlikely to react negatively to this fiscal push, he said in an interview on Wednesday.

The Reserve Bank of India (RBI) will announce on Friday the outcome of its latest monetary policy committee (MPC) meeting, amid expectations that it may discount the inflation fears for now and hold key rates to brighten growth prospects.

Asked if the fresh deficit road map will warrant a revision of the inflation-targetting framework, Bajaj said the government is in talks with the RBI and a decision will be taken in March. The Centre intends to cut fiscal deficit to 4.5% by FY26, against the pre-Covid goal of containing it at 3.1% by FY23. The RBI’s current retail inflation target of 4% within a (+/-2)% band is coming up for review in March.

As such, the inflation gauges have given conflicting signals over the past one year. Retail inflation plunged to a 15-month low of 4.59% in December, as moderating food inflation and a conducive base. But prior to this, it had remained above the MPC’s tolerance band of 4 (+/-2)% for 10 of the 11 months. In contrast, wholesale price inflation remained subdued, having moved in the range of -3.4% to 3.5% during this period, complicating the job of assessing the actual price pressure in the economy.

Citing the preliminary findings of its survey of manufacturing companies, the central bank had in December said capacity utilisation (seasonally-adjusted) improved from 47.9% in Q1, when lockdown was in force, to 62.6% in Q2, but still remained well below the long-term average of 74%. This was “either because of supply constraints or lack of demand”, it had said.

The government’s fiscal deficit shot up to 9.5% of GDP in FY21, as it was forced to offer relief packages despite a plunge in revenue collections due to the pandemic. Even though the nominal GDP is expected to reverse a contraction and expand at 14.4% in FY22, the indispensability of continued spending to spur growth and save both lives and livelihood has forced the Centre to keep the deficit elevated in the current fiscal as well.

Bajaj highlighted the government’s commitment to stepping up capital expenditure, with focus on creating large-scale physical infrastructure. This sort of spending is not inflation-inducing, he said, highlighting the quality of the proposed expenditure. According to a study by NIPFP, the multiplier of funds deployed in physical infrastructure in India is as high as 2.5 in the year of investment and 4.5 over a few years.

The government has budgetted capital expenditure at Rs 5.45 lakh crore for FY22, which is 26.2% higher than the RE of FY21 and 34.5% larger than the BE level for this fiscal. In contrast, at Rs 29.3 lakh crore, the budget estimate (BE) of revenue expenditure for FY22 is 3% lower than the revised estimate for this fiscal and 11.4% higher than the BE of FY21.

As such, the low tax buoyancy in the wake of Covid-19 has served to magnify the deficit, and the Budget isn’t quite an expansionary one, some analysts have said.