By Dharmakirti Joshi
The strategy in the Budget for the next fiscal reflects the gradual change in focus from Covid-related risks to recovery-related ones. Last year’s Budget was presented in the backdrop of the sharpest slowdown in growth since Independence; this one is about stoking a broad-based recovery.
The Budget needed to have sufficient flexibility to address the risks of further Covid-19 waves next fiscal. Additionally, the monetary policy, which had been proactively accommodative since the pandemic began, may not be so going forward.
The most significant task for this Budget was striking a balance between spending to raise the economy’s growth potential and addressing the vulnerabilities spawned by the pandemic. So, it makes sense to assess the implications of its overall fiscal stance and focus on spending. Fiscal deficit at 6.9% of GDP is a tad higher than what was budgeted for this fiscal.
This is despite the extraordinary buoyancy in tax collections on the back of a very high nominal GDP growth of 17.6% and pay-off from streamlining of the Goods and Services Tax (GST) process. This has reversed the trend of tax revenue underperformance over the past few years. Had it not been for the slippage in divestments, the deficit would have been on target. The fiscal policy remains growth-supportive for the next fiscal as well as for the medium run. The government projects a reduction in fiscal deficit to 6.4% of GDP next fiscal, premised on conservatively estimated nominal GDP growth of 11.1%. We think this can be easily exceeded.
The important question is how it will be achieved — by real growth, or inflation, as we saw in this fiscal. We project real growth at 7.8% next fiscal, with overall inflation around 5.2%. Currently, given high crude oil prices and a slowing global economy, risks to growth are tilted to the downside and to inflation upside. By fiscal 2026, the deficit is expected to come down to 4.5% of GDP, still higher than the pre-pandemic level of 3.3%. This provides fiscal space to address spending needs, while not losing sight of the imperative to pare debt and deficits. India, after all, has the highest debt ratio in the peer group of similarly rated countries. The focus on reviving investments, which are faring better than private consumption, is evident in the measures taken to push up infrastructure investments. Capital expenditure via Budgetary spending is projected to increase 25% in the coming fiscal.
There is indirect support to the vulnerable segments from extension of ECLGS scheme for MSMEs and increased allocation to PMAY and PMGSY which
will help generate employment and is positive for private consumption. A decisive lift in consumption cycle is, therefore, tied to a broad-based pick-up in economic activity which also requires no major disruption from Covid-19 beyond the existing wave.
Despite the correction in fiscal deficit envisaged in the next fiscal, gross borrowings of the government at over Rs 14 lakh crore will put upward pressure on government bond yields, which have already risen a lot because of high crude prices and the anticipated change in the Reserve Bank of India’s accommodative stance.
The author is Chief Economist, CRISIL
