Budget 2021: Expect growth correcting budget that raises expenditure, cuts fiscal deficit, says Dr Rangarajan

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Updated: December 15, 2020 6:19 PM

Former RBI governor and economist Dr C Rangarajan says the year 2021-22 will be the year of correction, while 2020-21 will end with a net GDP contraction of around 8 percent.

Budget2021, Budget-2021, Union Budget, Dr C Rangarajan, RBI, recession, Indian economyBudget 2021: Dr Rangarajan, like most leading economists, also sees prospects for economic growth closely linked to economic stimulus emanating from increase in government expenditure.

Union Budget 2021: In a year that saw India technically slide into recession, witness an implosion in the labour market, put the spotlight on health – of both those with or without wealth, there is now a glimmer of hope. The start of 2021 is expected to start delivering deliverance from the virus with the first wave of vaccines getting ready. Equally crucial for the bruised economy to hinge its hopes on the Union budget 2021 for measures to not just ensure growth but also help regain the lost ground this year.

We at Financial Express Online spoke to Dr C Rangarajan, the veteran economist and former governor of the Reserve Bank of India and one who has been closely watching with concern the impact of the pandemic on the economy. He is best placed to tell us on what one should reasonably expect the Union budget 2021 to deliver.

He began by saying: “the year 2021-22 will be the year of correction. This year – 2020-21, as the various estimates suggest, will end with a net contraction in the Gross Domestic Product (GDP) of around 8 per cent. Therefore, the year 2021-22 must aim to correct this fall in GDP.”

To ensure the economy bounces back to the pre- pandemic level and helps the economy recover the lost ground this year, he says, “the economy needs to grow at 8 per cent in 2021-22 to regain the lost ground. We need a growth rate that will try to offset the decline in 2020-21.”

To get there, there are three numbers he will be closely watching in the budget: The over all level of government expenditures, the capital expenditure and the fiscal deficit.

Dr Rangarajan, like most leading economists, also sees prospects for economic growth closely linked to economic stimulus emanating from increase in government expenditure, especially the capital expenditure. However, he is very clear that this should not mean an increase in fiscal deficit. In fact, he sees a clear case to reduce the fiscal deficit by at least 2 per cent. The fiscal deficit, he says, “should be coming down. I believe that the fiscal deficit of the government of India will be around 7 per cent of the GDP, lower than the 9 per cent some were expecting had the government incurred more expenditures, as was expected.”

The 7 per cent central government fiscal deficit, he says, along with the states put together could touch a total of 12 per cent of the GDP. This, to him, is on the basis that the expenditures that the government is talking about are all additional expenditures. Dr Rangarajan feels, “the government of India should be bringing down its fiscal deficit by at least 2 per cent of the GDP.” This, he cautions, does not mean that there should be any reduction

in capital expenditures “because the fiscal deficit is high today on account of revenue loss but if the economy grows at 8 per cent next year then the revenue should be growing. Therefore, you should not have the fiscal deficit at the current year levels and it should come down.”

And in this, he says, “it is not a question of expenditures going down. In fact, they must be maintained at a higher level” but if revenues grow from their current year levels by about 10 per cent and assuming an elasticity of one, then, he feels, a 8 per cent of growth should give 8 per cent increase in income.

In favour of increase in government expenditure and the economic stimulus effect that comes with it, he hopes the government will spend more in the next three to four months “because for instance, the GDP number for the second quarter showed the segment which is called public administration, defence and other services end up with a contraction of 12.2 per cent. This is the time to spend as that is crucial for stimulation in the economy because a cutback elsewhere does not result in a net additional expenditure.”

While he sees a need for a significant diversion of the government expenditure towards capital expenditure, he does expect some of the financing of the infrastructure pipeline coming from public sector institutions borrowing from the market.

The increase in government expenditures, he feels, will be guided by the health and economy priorities – for industry, agriculture apart from health where costs will need to be incurred towards delivery of the vaccine. This could mean a
one-time increase in health expenditure in 2020-21 to be borne by the government.

He does not much room on tax reforms for much of that has already been done reflecting in some of the corporate taxes foregone this year. “What therefore should be expected is that during 2021-22, the tax reductions made in 2020-21 will take effect and therefore reducing the need for further tax concessions now.”

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

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