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The government will “comfortably" meet its fiscal deficit target of 6.8% of gross domestic product in the current fiscal, and may also have space to ramp up capital spending, if needed, on the back of strong revenue growth, according to the Economic Survey 2021-22.
This comes amid the Reserve Bank of India’s reservations over the government's ability to rein in the fiscal deficit at the budgeted 6.8% in the current fiscal year.
“… a strong rebound in government revenues in 2021-22 has meant that the Government will comfortably meet its targets for the year while maintaining the support, and ramping up capital expenditure," according to the Economic Survey tabled in Parliament on Monday.
The strong revival in revenues means that the government has fiscal space to provide additional support, if necessary, it added.
Revenue receipts of the central government during April-November 2021 have jumped 67.2% YoY as against the expected growth of 9.6% in the 2021-22 Budget Estimates (over 2020-21 Provisional Actuals).
The Survey also expected revenues to remain buoyant in the medium term ensuring that the Union government will be on track with the medium-term fiscal roadmap.
“A robust economic growth path and various tax policy and administration reforms undertaken over the last few years will be fundamental in sustaining the buoyant revenues in the medium term, and thus, be on track with the fiscal path outlined by the Medium-Term Fiscal Policy Statement," according to the Survey.
The finance minister, in last year’s budget speech, laid out the government’s plans to reach a fiscal deficit of below 4.5% of GDP only by fiscal 2026.
“As the economy grows further, the revenue collection from all the sources is expected to be more robust, which will help to strengthen the fiscal position on one hand, and create fiscal space on the other. Thus, it is expected that reaching the budget estimate for fiscal deficit during 2021-22 will not be a concern for the Central Government," it added.
Capital expenditure has been estimated to increase from 12.1% of total expenditure in 2020-21 to 15.9% in 2021-22 BE. “The higher capital expenditure with a focus on infrastructure spending in 2021-22 BE will have a multiplier effect on the ongoing economic recovery," the Survey suggested.
The primary deficit during the period April to November 2021 turned up at nearly half of the level it had reached during April to November 2019.
“This implies that the Government has the fiscal capacity to maintain the support, and ramp up capital expenditure when required. The strong revival in revenues also provides the Government with fiscal space to provide additional support as well, if necessary," added the Survey.
Rumki Majumdar, economist, Deloitte India said that while India needs sustained efforts to kickstart the virtuous cycle of demand creation and investment spending,, the government also has to plan for a timely exit. "A prolonged fiscal deficit can concern investors, raise sovereign yields, and increase borrowing costs. The government will have to consolidate its position so that expenses do not result in crowding out of private investment and adding to inflationary pressures," added Majumdar. We expect that the government will emphasize consolidating its fiscal balance and focus its resources on productive investment in tomorrow’s budget, she added.
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