For financing the proposed increase in capital expenditure, major initiatives are being undertaken for monetizing government and public sector owned assets and reinvigorating the disinvestment program. For asset monetization, a National Monetization Pipeline is being launched. A massive increase in disinvestment receipts has also been budgeted, raising its level to ₹1.75 lakh crore in 2021-22 from ₹32,000 crore in 2020-21 (RE), implying an increase of 447%. While no significant tax revenue changes have not been introduced, reliance has been based on normal GDP growth and buoyancy assumptions.
Realizing an assumed nominal GDP growth of 14.4% and a buoyancy of 1.2, implying a growth of 16.7 % in Centre’s gross tax revenues, would be key to maintaining a fiscal deficit-to-GDP ratio of 6.8% in 2021-22. Slippage in these parameters may push up the Centre’s fiscal deficit above 7% of GDP. Both growth and tax buoyancy are contingent upon economic conditions remaining unaffected by a second round of Covid-19 which is being faced by many countries.
Based on the recommendations of the Fifteenth Finance Commission, the fiscal consolidation paths of the central and State governments have been revised. In the case of the central government, the center’s fiscal deficit-to-GDP ratio is being targeted to be reduced from a level of 9.5% in 2020-21 (RE) to 4.5% in 2025-26 in graduated steps. For the state governments, it is being targeted to be reduced to 3% of GDP by 2023-24. The Commission has proposed the setting up of a high-powered intergovernmental group to examine the debt and deficit sustainability framework and amend the existing FRBM Act accordingly. One of the key issues that such a body may be required to address is to consider whether the fiscal consolidation roadmap should be asymmetric between the central and state governments. With the central government being allowed to borrow more than the state governments up to 2025-26, such an asymmetry is already being implemented through Union Budget 2021.
(This article is first appeared in Hindu Business Line on 2 February 2021.)