Economic Survey: Growth-supporting countercyclical fiscal policy proposed

January 30, 2021 4:27 AM

The contraction in the Centre’s gross tax revenues has come down sharply to (-)3.2% by December 2020 from (-)12.6% up to November 2020.

Even more important is the need to invest in infrastructure.Even more important is the need to invest in infrastructure.

By DK Srivastava

Economic Survey of India: Agreeing with the NSO’s assessment of 2020-21 real GDP growth at (-)7.7%, the Economic Survey assesses 2021-22 growth at 11.0% — in line with the IMF’s recent estimate of 11.5%. In order to remain consistent with this sharp recovery, the Survey advocates an active but flexible approach to fiscal consolidation, emphasising the macro-stabilising role of the fiscal policy. It may imply a graduated reduction in the Centre’s fiscal deficit relative to GDP from the likely deviation from FRBM norms in 2020-21. Using the CGA’s release of the Centre’s fiscal aggregates for the first nine months of 2020-21, we may have a view on the extent of this deviation.

The contraction in the Centre’s gross tax revenues has come down sharply to (-)3.2% by December 2020 from (-)12.6% up to November 2020. If this trend continues in the remaining three months, the Centre may be able to accommodate a total expenditure growth of 8% by keeping its fiscal deficit at about 6.5% of GDP in 2020-21.

In order to realise the expected high real GDP growth next year, fiscal deficit may fall by a small margin, still remaining well above FRBM norms. Given the nominal growth estimate of 15.4%, it is possible the Union Budget may estimate a buoyant tax revenue growth, possibly in the range of 17-18%. With such a robust tax revenue growth supplemented by a reinvigorated disinvestment and spectrum sales programme, it may be possible for the Budget to show a healthy increase in capital expenditure while marginally reducing the fiscal deficit. Thus, we expect the fiscal deficit in 2021-22 to be in the range of 5-5.5% of GDP.

The Survey provides an analytical perspective of debt dynamics specifying the relative roles of interest and growth rates. It advocates a countercyclical fiscal policy. In particular, it asserts that even with a higher fiscal deficit in the initial years of the revised consolidation path, it would be critical to implement the National Infrastructure Pipeline (NIP) which would result in generating higher paying jobs and boosting productivity. We expect the revised fiscal consolidation roadmap would be guided by the recommendations of the 15th Finance Commission. This may be consistent with a fiscal deficit of 6.5% of GDP in 2020-21 and 5.5% in 2021-22 and then a graduated reduction so as to reach 3% by 2025-26.

The Survey also provides a simulation on the likely paths of adjustment for the combined debt-GDP ratio for central and state governments. Its starting point is an estimate of close to 89% for the consolidated debt-GDP ratio of the Centre and states by the end of 2020-21. This comes down to close to 82% by the end of 2021-22. Using the middle-growth scenario, it comes further down to nearly 71.0% by the end of 2028-29. This path of reduction is due to the role that growth plays in the dynamics of debt. It is this trade-off between growth and fiscal stimulus that provides support for the argument that fiscal policymakers need not be overly concerned with a heavy reduction in fiscal deficit relative to GDP in the years that immediately follow the Covid shock.

The high debt-GDP levels in 2020-21 and 2021-22 would imply a rise in the share of interest payments in total expenditure in the Centre’s and states’ budgets. The fiscal space that may be released for augmenting government capital expenditure would be less than the rise in fiscal deficit relative to GDP because of the pre-emptive claims of interest payments. However, the Survey correctly emphasises priority for the health sector. In the context of the ongoing pandemic, this may be both justified and expected.

Even more important is the need to invest in infrastructure. The Survey also argues this unambiguously. It asserts that during economic crises, a well-designed expansionary fiscal policy stance can contribute to better economic outcomes as it can boost potential growth with multi-year public investment programmes financing the already envisaged NIP. It will also help in crowding in private investment.

The author is chief policy adviser, EY India

–Views are personal

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