By Renu Kohli
Against the deep economic contraction and extreme fiscal caution last year, fiscal policy was expected to give a big push in this budget. Does the Budget deliver on these expectations? On the surface, yes; a deeper look shows the increase in capex is not the bang as announced.
The context of assessing the fiscal response is the extent of demand loss relative to pre-Covid. Nominal GDP is projected to grow 14.4% in FY22, or 10% in real terms (minus 4.4% inflation) over FY21, which isn’t particularly telling because of the -7.7% contraction. Skipping the pandemic effect, the 10% growth represents a feeble 1.5% growth in GDP over pre-Covid growth of 4% in FY20. Assuming the economy had recovered to 5.5% in FY21, aided by the pre-Covid monetary-fiscal support measures and had there been no Covid, strengthened further to 6.5% in FY22, the cumulative loss of output works out to -9.7% and remains to be recouped.
What is the effective fiscal support against this loss? First, the current spending this year (FY21RE), is massive, manifest in the larger-than-anticipated deficit of 9.5% of GDP, and financed by market borrowings (`12.7 trillion or 6.5% of GDP) along with doubling of NSSF (2.5% of GDP). This uplifts current spending 4 percentage points to March 2021 this year. Next year, the borrowing will rise to `9.7 trillion, while overall expenditure is pegged at lower by 2.1 ppts than FY21 (RE), at 15.6% of GDP. The entire decline comes from reduced current expenditure, mainly subsidies, all of which are taken on board; the food subsidy will be higher by 0.56% of GDP relative to FY20. Nonetheless, current spending will still be 1.6 percentage points higher compared to FY20 levels!
Capex, which is job-rich and can offset employment declines from lockdowns and K-shaped recovery effects, is projected to grow 26% year-on-year, nearly double the nominal GDP’s pace. At first sight, this suggests significant thrust, as a share of GDP capex lifts to 2.5% in FY22 from 2.3% in FY21 (RE versus 1.8% initially budgeted) and the 1.6% pre-Covid (FY20). However, a holistic assessment requires looking at total capex, i.e. inclusive of resources of public enterprises where a bulk of capex has occurred in past few years. The total increase in budgetary and public enterprise resources capital spending in FY22 is 4.8% over last year (FY21RE) and 16.4% over FY20; at 5.1% of GDP next year, it is only 30 basis points above pre-Covid (FY20 actual), down from 5.6% last year.
Compared to current spending, total capex grew a sober 11% in FY21RE over FY20. In fact, capex through PSEs barely moved (0.6% growth over FY20 actual) last year and contracts -9.7% in FY22 over FY21RE. Seen this way, the infrastructure push is not as massive as at first sight.
The financing arithmetic betrays the severity of the fiscal situation, borrowing dependency and challenges ahead. Revenue support is small, fairly conservative: compared to FY19, which is the most normal baseline (FY21 and FY20 are unusual because of the pandemic and corporate tax cuts), total revenues are projected to grow 15.2%, with -2.5% growth in direct taxes, 8.3% growth in GST revenues, and continued robust support from excise duties (44% growth). Mercifully, with high fuel taxes impacting consumption, further taxation has been avoided.
The actual deficit outturn, at 9.5% (FY21RE), exceeds expectations as does the 6.8% estimate for FY22; 64% of the deficit—4.3% of GDP—will be met with borrowings! Twenty-six percent, or `3.9 trillion, of financing is from NSSF; and 12%, or 0.8% of GDP, is from disinvestments. The adverse bond market reaction—the 10-year benchmark yield closed 10 bps higher—reflects raised fiscal anxieties about borrowing pressures, for disinvestments remain in the air until realised, and, hence, become a source of uncertainty for markets.
As all the subsidies are taken on-board this year, it is not clear how and why the extra-budgetary liabilities (EBR) have shot up to 3.1% of GDP in FY21 (RE), from an estimated 0.9% one year ago; ideally, these should have reduced to zero. EBRs will still be 2.9% of GDP in FY22.
The ground to recover, that is, growth, as well as fiscal consolidation, is enormous ahead. The retreat of fiscal deficit to below 4.5% of GDP by FY26 is drawn out to five years! This is to be achieved through revenue buoyancy (including better compliance) and asset monetisation (PSE, land). The medium-term challenge is the weighing of growth against consolidation: Revenues are linked to growth outcomes, which have disappointed and derailed consolidation in the past, denting fiscal credibility; asset monetisation now becomes absolutely critical for public finance repairs. Along with FRBM amendment and fresh medium-term redemption plan, these will be key for rating agencies’ assessments.
The author is Delhi-Based Economist