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Budget: FM ignores rating agencies, goes for massive fiscal expansion to boost growth

Amitabh Tiwari
·3-min read

Nirmala Sitharaman’s fiscal deficit estimates announced in the budget have surprised the economists and analysts. The fiscal deficit for financial year (FY) 2020-21 is revised to a staggering 9.5% of GDP.

A poll by Bloomberg had put consensus estimates at 7.25% of GDP. The budget for 2020 had put the number at 3.5% of GDP before the pandemic struck.

For the next year, FY 2021-22, the fiscal deficit has been projected to be 6.8% of GDP versus a consensus estimate of 5%. She has proposed a roadmap of gradual fiscal consolidation to bring down the fiscal deficit to 4.5% of GDP by FY26.

Accepting the recommendations of the 15th Finance Commission (FFC), the minister has increased the ceiling for state borrowing to 4% from 3% allowed earlier.

The high fiscal deficit is on account of higher government expenditure to boost growth in a pandemic year where tax collections and disinvestment proceeds were impacted by lockdowns.

The central government had projected Rs. 20.20 lakh crore of revenue receipts (tax plus non tax) for FY 2020-21 against which only Rs. 15.55 lakh crore (-23%) is expected to be realised.

As against a disinvestment target of Rs. 2.1 lakh crore, only Rs. 32,000 crore (-85%) is expected to be received.

As all components of growth - private consumption, investments and exports - were struggling for revival during the year, all eyes were on the government to provide a boost to growth by incurring higher spending on social welfare schemes (NREGA, free ration) and infrastructure.

Consequently, the government is expected to spend Rs. 34.5 lakh crore (+13% than budgeted) in FY 2020-21. The borrowings and other liabilities are expected to more than double from an estimated Rs. 8 lakh crore to Rs 18.5 lakh crore.

Next year too, in FY 2021-22, the government is expected to keep spending high at Rs. 34.8 lakh crore in creating health infrastructure and other capital expenditure. The capex is slated to increase by 35% to Rs. 5.5 lakh crore.

India, which has always been very cognizant of taking a conservative fiscal expansionary path, due to adverse action by rating agencies has signalled a change in its attitude and strategy.

The Economic Survey presented on January 31st, had highlighted how India’s sovereign credit rating didn’t reflect its fundamentals.

“As ratings do not capture India’s fundamentals, it comes as no surprise that past episodes of sovereign credit rating changes for India have not had a major adverse impact on select indicators such as Sensex return, foreign exchange rate and yield on government securities. Past episodes of rating changes have no or weak correlation with macroeconomic indicators.”

The Finance Minister seems to have heeded to Chief Economic Advisor Dr. Krishnamurthy Subramanian’s suggestion, “India’s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear.”

At a time when Indian economy is reeling from shock induced by COVID-19, the question before the Finance Minister was whether the medium term fiscal policy strategy should focus on growth

or fiscal restraint.

India went ahead and adopted a countercyclical expansionary fiscal policy in times of crisis which is expected to boost GDP growth both directly, and indirectly through multiplier effects on private consumption expenditure and private investment.

At a time when high fiscal deficits have been the order of the day in the world in an extraordinary year, for example 15%+ for the United States, India’s fiscal deficit number looks reasonable.

Moreover, the finance minister’s roadmap to bring the fiscal deficit down to 4.5% by FY26, commitment to continue with transparency in fiscal matters like no borrowing from National Small Savings Fund for Food Corporation of India will make the rating agencies happy.

Moody's Investors Service, while silent on the sovereign rating on the higher-than-expected fiscal deficit numbers, expressed doubts over attaining the higher revenue targets and divestment realisation as assumed in the Budget, according to PTI.


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