While the current deviation from the rule-based fiscal framework was necessitated by the severity of the economic shock, it is necessary to monitor and manage it in a transparent fashion.
February 01, 2021 / 08:35 PM IST
The Union Budget for the year 2021-22 (FY22) has been announced against the backdrop of an unprecedented economic disruption triggered by the COVID-19 pandemic. Postponement of the fiscal discipline is the need of the hour given the gravity of economic stresses the nation is suffering from. Several governments across the world have followed the same path to help their respective economies stay afloat. While preparing the Budget for FY22, the Government of India too has used the escape clause to allow temporary deviation from the fiscal rules.
The Budget has given a strong push to economic growth by significantly increasing the capital expenditure to Rs 5.54 trillion in FY22 by placing health and infrastructure at the centre. Not just that, it has pushed the expenditure even in the last quarter of FY21 by more-than-double. This has increased the fiscal deficit to GDP ratio to 9.5 percent in FY21 and 6.8 percent in FY22 with gross market borrowings pegged at Rs 12.06 trillion in FY22 also. While the long-term government security yields and corporate bond yields rose sharply post the announcement of the market borrowing numbers, the real sector was buoyed due to a significant and transparent push to growth.
The government has wisely decided to spend more on infrastructure (especially on roads and power), health sector and agriculture, which have strong linkages to the rest of the economy. Higher allocation of Rs 350 billion in FY22 for COVID-19 vaccines should also help normalise economic activity at a faster pace. Another noteworthy measure is the higher level of fiscal deficit anchor granted to the state governments. This will help them enhance their capital spending, especially for the projects from the National Infrastructure Pipeline.
Several progressive steps are being taken to strengthen the quality of financial intermediation. For example, the setting up of ARC and AMC for banks that are suffering from the overhang of stressed assets and NPAs, recapitalisation of PSBs by Rs 200 billion, increase in the FDI limit in insurance from 49 percent to 74 percent, strengthening of NCLT framework by introducing e-courts, push to divestment and monetisation of assets and a proposal to set up a DFI (development finance institution), etc. These measures will be instrumental in generating long-term developmental funds as well as faster resolution of stressed assets.
A strong need felt for setting up a DFI, 20 years after doing away with that organisational form teaches us an important lesson. Policymakers should never hastily abandon the existing institutional infrastructure without a proper thought, as it involves a deadweight loss for the nation. By closing down the DFIs, we as a nation have lost not just the skills and specialisation but also the culture of ‘development finance’. Now we have come back full circle.
While the Budget announcements are both pragmatic and progressive, the success of these measures depends on timely implementation of projects. High fiscal deficits and market borrowings may not pose a major risk, if the economy is brought back to a sustainable high growth path in the coming couple of years. However, the government should continue to support economic growth through increased public spending until private investment spending starts growing sustainably.
While the current deviation from the rule-based fiscal framework was necessitated by the severity of the economic shock, it is necessary to monitor and manage it in a transparent fashion and define a process to return to the rule, to preserve the credibility of our FRBM framework. The starting point for unwinding the exceptional ‘fiscal stimulus’ should be clearly linked to the growth trajectory to avoid getting trapped into inflationary risks.