The enhancement of “budget transparency” with regard to deficit numbers, presented in the 2021-22 Union Budget, is welcome.

 

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Extraordinary times require extraordinary policy responses. Against the backdrop of macroeconomic uncertainty in the time of the COVID-19 pandemic, finance minister Nirmala Sitharaman has presented a “significant” fiscal deficit number – which went up to 9.5% in FY21 – from a position of strength. Simultaneously, commencing a fiscal consolidation path to execute an “excessive deficit procedure” in the Union Budget 2012-22 to bring down the excess deficit of 9.5% of GDP in FY21 to 4.5% by FY26 is inevitable. However, this narrative of “deficit is good” in the time of a pandemic is welcome.

 

The fiscal consolidation through expenditure compression rather than increased tax buoyancy affects the quality of fiscal consolidation. From that perspective, allowing the fiscal deficit to rise above the threshold level of 3% of GDP, without significant expenditure compression, is welcome. However, the anatomy of the determinants of borrowings – decomposed by revenue uncertainties, economic stimulus-related spending, the narrowing of divisor GDP, lowering of rates of interest, etc. – would be fascinating to understand with a precision that components have exactly contributed to the aggregate level of high deficits.

 

The cleaning of deficit incurred from off-budget liabilities through public sector undertakings is still a matter of concern. Such borrowings don't figure in the concept of fiscal deficit However, the Union Budget 2021-22 has not introduced the deficit termed as “Public Sector Borrowing Requirement (PSBR)”, integrating the borrowings incurred through public sector enterprises. The details of extra borrowings are kept in an Annexure in the Union Budget document.

 

The new fiscal rules

 

The new Fiscal Responsibility and Budget Management (Amendment) is tabled in the parliament today. The existing fiscal rules are amended to incorporate the revised threshold of deficit to GDP. this is the third time the FRBM has been amended in India. As per the second change, the “revenue balance” was eliminated and clauses about “revenue balance” were incorporated in the money Bill to maneuver away from the “golden (fiscal) rule” of zero revenue deficits.

 

Though there was a debate regarding the choice of deficit – whether revenue deficit, fiscal deficit, or primary deficit was to be the “operational deficit parameter” in India – in the FRBM Committee Report with a dissent note from Arvind Subramanian favoring the primary deficit (fiscal deficit minus interest payments), the Union Budget 2021-22 reiterated that fiscal deficit is still the operational concept of deficit in India. However, primary deficit is useful to understand the current fiscal stance without the legacy of past interest payments (Table 1).

 

Table 1. Levels of Deficit

 

2019-20	2020-21	2020-21	2021-22
	Actuals	Budget Estimates	Revised Estimates	Budget Estimates
Fiscal Deficit	933651	796337	1848655	1506812
	(4.6)	(3.5)	(9.5)	(6.8)
Revenue Deficit	666545	609219	1455989	1140576
	(3.3)	(2.7)	(7.5)	(5.1)
Effective Revenue Deficit	480904	402719	1225613	921464
	(2.4)	(1.8)	(6.3)	(4.1)
Primary Deficit	321581	88134	1155755	697111
	(1.6)	(0.4)	(5.9)	(3.1)

Source: Government of India (2021), Union Budget 2021-22 documents

 

The enhancement of “budget transparency” with regard to deficit numbers, conferred in the 2021-22 Union Budget, is welcome. The Food Corporation of India’s borrowing from the National small Savings Funds are going to be stopped to usher in budget transparency. When the FY21 fiscal deficit has reached 9.5%, the government envisions borrowing another Rs 80,000 crore in the next two months. For FY22, the fiscal deficit is pegged at 6.8% of GDP. The gross market borrowing will be Rs 12 lakh crore, which is 68.9% of total borrowings. The other sources of financing like the National Small Savings Fund constitute around 26% (Table 2).

 

Table 2. Sources of Financing Fiscal Deficit (Rs crore)

 

2019-20		2020-21		2020-21		2021-22
	Actual	% of Total	Budget Estimates	% of Total	Revised Estimates	% of Total	Budget Estimates	% of Total
Debt Deficit (Net)
Market Borrowings (G-Sec + T Bills)	624089	66.84	535870	67.29	1273788	68.9	967708	64.22
Securities against Small Savings	240000	25.71	240000	30.14	480574	26	391927	26.01
State Provident Funds	11635	1.25	18000	2.26	18000	0.97	20000	1.33
Other Receipts (Internal Debt and Public Account)	44273	4.74	50848	6.39	39129	2.12	54280	3.6
External Debt	8682	0.93	4622	0.58	54522	2.95	1514	0.1
Draw Down of Cash Balance	4971	0.53	(-)53003	(-)6.66	(-)17358	(-)0.94	71383	4.74
Grand Total	933651	100	796337	100	1848655	100	1506812	100

Source: Government of India (2021), Union Budget 2021-22 documents

 

‘Mini budgets’ in continuum for economic stimulus

 

In the Union Budget, creating fiscal areas for continuous support to ongoing series of economic stimulant packages was a matter of concern. In the regime of revenue uncertainties, the ambitious asset monetization program announced in the Union Budget to generate revenue proceeds need a supportive regulatory framework.

 

the economic stimulus is announced not as macroeconomic information to revive the demand by providing large cash transfers or a universal basic income (UBI). the concern was that if the people’s propensity to save is larger than payment in the time of a pandemic, dropping “helicopter money” or a UBI in the hands of the people cannot lead to required demand stimulation. The statistics show that precautionary savings by the private sector are on the rise during COVID-19. Instead of massive cash transfers, the Union Budget has provided targeted economic stimulus, particularly to capital infrastructure and the public health sector. the entire size of the budget for FY21 has increased to Rs thirty-four. 50 lakh crore. In FY22, total expenditure is pegged at Rs 35 lakh crore.

 

The emphasis on capital infrastructure spending for economic revival by increasing the capital expenditure for FY2021-22 by 34.5% to Rs 5.5 lakh crore is welcome. The estimates of capital expenditure for FY21 have been increased to Rs 4.39 lakh crore, as against the budgeted Rs 4.12 lakh crore. However, as a percentage of GDP, the capital expenditure as a share of GDP is still below 2%. The financing details of the other capital infrastructure projects announced in the budget through PPP models need further clarity.

 

The decision on intergovernmental fiscal transfers

 

The finance minister has announced a brand new centrally sponsored scheme (CSS) for enhancing public health infrastructure – the PM Atmanirbhar Swasth Bharat Yojana – with an outlay of Rs sixty-four,180 large integer over the next six years. This CSS is in addition to the government’s existing National Health Mission. The focus of a new CSS in the health sector will be on three areas – preventive, curative, and well-being.

 

However, the finance minister has also declared a plausible convergence of CSS, as recommended by the Fifteenth Finance Commission report, which is tabled within the parliament today. This move will shift the composition of intergovernmental fiscal transfers from conditional grants to tax-transfer formula-based unconditional transfers (which is 41% of the tax pool as recommended by the Fifteenth Finance Commission). The unconditional transfers provide flexibility to state governments to prioritize their spending, rather than designing “top-down” programs. However, designing a new public health infrastructure-related CSS can affect the fiscal autonomy of the states in dealing with the issues of the health sector, unless it is judiciously rolled out within the contours of cooperative federalism.

 

Union Budget ‘nudging’ the calculus of consent

 

Finally, the emphasis on state-level public infrastructure investment in the Union Budget, including the states like Kerala and province, invokes the calculus of voting behavior. Does democracy determine public expenditure decisions? The Union Budget 2021-22 can answer this in the affirmative solely in the forthcoming subnational elections.

 

Economists globally have analyzed empirically whether positive public policy decisions by the dominant party in power or the economics of ethnic-fragmentation and religion matter more for a median voter to choose their government. If it is the former, that the calculus of consent favors the party in power, then the Union Budget 2021-22 could effectively signal the benefits.