In the budget, Union Finance Minister Nirmala Sitharaman announced a budget deficit of 6.9% of Gross Domestic Product (GDP) in the revised estimates for 2021-22, compared to the indexed deficit of 6 .8% in the 2020-2021 budget estimates. At the same time, it has not deviated from the medium-term fiscal consolidation path to reduce the high fiscal deficit to 4.5 percent of GDP by FY26.
The Minister presented a very high budget deficit of 9.2% of GDP last year in 2021-22 from a position of strength, justifying that it is a question of strengthening public investment, which in turn can “attract » private investment. A high budget deficit is seen as promoting growth during a pandemic.
In the context of the pandemic, there is a refreshing perspective on “fiscal rules” – whether to adhere to numerical deficit threshold ratios. The quality of fiscal consolidation suffers if the path to fiscal consolidation is through spending cuts rather than through increased fiscal policy.
In 2022-23, the budget deficit-to-GDP ratio is reduced to 6.9% mainly thanks to strong taxes, although spending cuts in a few schemes – including food security and job guarantee schemes – are undeniable. It also provides insight into how we have reduced the revenue deficit from 7.3% of GDP in 2020-21 (RE) to 4.7% in 2021-22 (RE).
Although there has been no “formal announcement on normalization”, such spending cuts give sufficient indications of governments’ intention to reduce revenue shortfalls. While the underlying assumption that “revenue spending is bad”, it can be detrimental in times of pandemic, as policies related to social infrastructure, especially in health, education, food security and job security, need budgetary support. The reduction in budget allocations, including MNREGA and food subsidies, is a matter of concern.
High investment spending is welcome as it can support a sustained recovery in growth. Capital expenditure in 2022-23 has been greatly increased by 35.4% in the Union Budget 2022-23.
It goes without saying that a high public debt has no budgetary costs if the real interest rate is not higher than the real growth rate of the economy. This story is very close to the dynamics of public finances in Kerala. The state has explored innovative sources of funding for public infrastructure projects. The sources of financing of the public deficit in the budget show that the gross borrowing on the market is the dominant mode of financing. If the yield limit on long-term government securities increases, it will increase the government’s cost of borrowing. However, volatility in global financial markets and impending crisis crises are pushing the RBI to raise policy rates, in order to prevent capital flight.
The FY22 economic survey tabled in Parliament on Monday highlighted that the government was supporting the pandemic-stricken economy through simultaneous short-term (safety nets) and long-term (structural) programs for a sustained recovery – referred to as “Bayesian”. But, there is a glaring absence of announcements in the 2022-2023 budget for small businesses and low-income households suffering from the pandemic and fighting for their survival.
Indeed, RBI has done the heavy lifting through massive liquidity injection programs. However, the uneven recovery in India tells us that the multiplier effects of credit-related economic stimulus measures are limited. The uneven recovery in India is a matter of urgent concern and I hope that economic stimulus packages will be announced to address it, outside the framework of the budget. Another interesting aspect is that even in the context of the elections, the government has not announced any policy packages for the states running for election — such as some infrastructure projects announced in last year’s budget for Kerala. and Bengal — to induce people’s “calculation of (voting) consent.”
The term “State” appeared approximately 20 times in the 2022-2023 budget, which clearly shows the minister’s intention towards cooperative federalism.
Lekha Chakraborty
The author is a professor at the National Institute of Public Finance and Policy, New Delhi
