The Budget will aid the growth in the aftermath of the pandemic, however, concerns remain over the fiscal deficit.

Concerns about fiscal deficit

• The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment.
• But concerns remain about fiscal deficit.

High expenditure growth

• Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus.
• For reaching the projected 2020-21 RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year appear extraordinary.
• This involves transferring on to the Budget, the accumulated food subsidies amounting to ₹2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans.
• The balance of subsidies amounting to ₹1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE).
• This is a desirable change towards transparency.
• Taking revenue expenditure figures as budgeted and adjusting for the NSSF-accumulated food subsidy amount, the growth is 6.7% in revenue expenditure in 2021-22 (BE) over 2020-21(RE).
• A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions.
• Clearing these payments is desirable and would add to demand.
• The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22.
•  Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.

Increase in receipts

• Significant increases are planned in non-tax revenues and non-debt capital receipts.
• This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales.
• From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22.
• In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE).
• Disinvestment initiatives have so far yielded minimal results.
• Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes. 

Steps towards asset monetisation

• An important initiative pertains to the launching of a National Monetisation Pipeline.
• The time lags involved in starting yielding revenue remain unpredictable because of various potential disputes and claims involving government-owned land.
• A transparent auction process needs to be set up to facilitate suitable price discovery.

Other institutional initiatives

• The Budget includes central government’s share to the National Infrastructure Pipeline.
• However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role.
• The Budget also proposes setting up of a Development Finance Institution (DFI), to serve as a catalyst for facilitating infrastructure investment.
• The DFI would have an initial capital of ₹20,000 crore.
• In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
• Much depends upon the fine-tuning the operations of these institutions.

Finance Commission’s recommendations

• In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes.
• The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants.
• The scope of revenue deficit grants has been extended to cover 17 States in the initial years.
• The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise.
• However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives.
• The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers against specific purpose and conditional transfers.
• States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%.
• The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status.
• The imposition of cesses which are almost permanent has reduced the shareable pool.
• In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).

Way forward

• The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States.
• The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States.
• Giving up the prudential norms will be a wrong lesson to learn from the crisis.
• The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.

Conclusion

Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.

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