Budget 2021: An expenditure-led budget can help trigger strong recovery for the Indian economy

Viewed from the demand side, this message is even clearer. Government final consumption expenditure (GFCE) is estimated to show a growth of 17.0% in 2HFY21 from (-)3.9% in 1HFY21. Clearly, the recovery in the GVA sector of ‘public administration, defence and other services’ and the turnaround in GFCE in 2HFY21 would call for a major augmentation of government expenditure in the last quarter of the fiscal year. This trend is expected to continue into the next fiscal year.

FY21 fiscal underperformance: Covid’s shadow

The Indian economy as well as government finances performed in FY21 under Covid’s debilitating shadow. This shadow was somewhat longer for government finances which contracted more sharply than the contraction in the economy. In 1HFY21, nominal GDP contracted by (-)13.3%, faster than the (-)21.6% contraction in center’s gross tax revenues (GTR). Center’s GTR contracted by (-)12.6% in the first eight months of FY21. By November 2020, center’s non-tax revenues (NTR) were at INR1.2 lakh crores as against the budgeted magnitude of INR3.8 lakh crores. Similarly, non-debt capital receipts (NDCR) during the first eight months stood at INR18,141 crores as against the budgeted magnitude of INR2.25 lakh crores.

In order to arrive at center’s FY22 budget (Budget 2021) aggregates, it is relevant to first derive the base numbers in terms of FY21 likely fiscal outcomes. In Table 1, we have shown full year FY21 estimates of center’s broad fiscal aggregates based on the CGA data for the first eight months, supplementing it by likely developments in the remaining four months of the fiscal year.

While we expect the rate of contraction in center’s GTR to fall sharply, it may not turn positive for FY21. A GTR contraction of about (-)3.5% in FY21 over FY20 actuals is likely which would translate to an absolute amount of about INR19.4 lakh crores. As compared to the budgeted FY21 magnitude, there may be a significant shortfall of close to (-)20% in center’s GTR. Centre’s NTR and NDCR may also fall well short of their respective budgeted magnitudes although there may be some pick up in the disinvestment activity as well as in NTR in the remaining four months of FY21. Spectrum sales have been announced to take off in March 2021. Stock prices are also buoyant. However, given the short time available to the center to get more mileage out of these sources, it may be possible to raise only limited amounts in the balance period available within the fiscal year.

During April to November 2020, center’s total (TE), revenue (RE) and capital expenditure (CE) grew by 4.7%, 3.7% and 12.8% respectively. A substantial step up of this growth rate may need to be ensured in the remaining four months in order to achieve the estimated growth in the sector called ‘public administration, defence and other services.

The central government appears to have timed its expenditure acceleration to coincide with the implementation of the vaccination program so that maximum mileage can be derived as the economy moves out of Covid’s shadow. Recovery in government receipts is expected to pick up in the last quarter of FY21. It may still be necessary to increase fiscal deficit to a level above the already announced borrowing program amounting to INR12 lakh crores, that is, 6.2% of GDP. In order to ensure a growth in total expenditure of 9-9.5% in FY21, fiscal deficit may have to be raised to 7% of GDP or above. This acceleration in fiscal stimulus is likely to be carried forward into the next fiscal year of which the forthcoming budget may be the main instrument.

Union Budget 2021 prospects: recovery under new fiscal consolidation path

Policy observers are suggesting feasible nominal growth rate for FY22 in the range of 11-15.5%^[1]. Considering the mid-point of this range at about 13%, the level of tax revenues may be assessed, by applying a buoyancy of 1.2, at INR22.4 lakh crores^[2], showing a growth of 15.6% over the FY21 estimated level (Table 1). Further, a significant improvement in NTR and NDCR is also being expected since it may be feasible to re-activate the disinvestment program and monetize some of the government assets.

In Budget 2021, the level of government expenditure and its sectoral composition would be critical for supporting growth. The magnitude of government expenditure would depend on tax revenue growth, prospects of NTR and NDCR, and fiscal deficit. With the Report of the Fifteenth Finance Commission available to the government, a new fiscal consolidation roadmap may be spelt out. The centre may examine this roadmap and suggest a feasible path for reaching the debt and fiscal deficit targets which may even be redefined. It may be desirable to target only a limited reduction in fiscal deficit relative to GDP in FY22 in the new consolidation roadmap. This would ensure that the expenditure-led growth story remains intact. It is useful to recall that in response to the 2008 crisis, fiscal deficit was raised in two successive years namely, FY09 and FY10 to 6.1% and 6.6% of GDP respectively. The FY21 Covid crisis is a more serious crisis. It is justified now to come up with a new fiscal consolidation roadmap. Continuing with a large fiscal deficit, it is also important to ensure that most of it is spent on augmenting CE.

In this context, it is important to review the progress of the National Infrastructure Pipeline (NIP) as the economy emerges out of Covid’s shadow. It would be appropriate for the centre to identify areas of deficiency in relation to the original targets and provide revised targets for all the major stakeholders namely, the central government and its public enterprises, the state governments and their public enterprises, and the private sector.

The center may also prioritize construction, manufacturing and electricity, gas and water supply. These sectors, particularly construction, have high multiplier effects. Within construction, health related infrastructure may be prioritized. Some support may also be needed for agriculture and trade, hotels, transport, storage and communications. Keeping the TE growth at above 10% in FY22 would provide enough fiscal space to support demand.

For financing health expenditure as also defence expenditure, the role of earmarked cesses is also being considered presently. Cesses in general may be discouraged. However, given India’s current economic and strategic situation, some exceptions may be relevant. The report of the Fifteenth Finance Commission may provide specific recommendations in regard to these. Effective policy formulation is key to ensuring a robust medium-term growth for the Indian economy.