Updated: February 2, 2021 9:59:02 am
Redrawing the fiscal consolidation roadmap, the government has projected a fiscal deficit of 6.8 per cent of Gross Domestic Product (GDP) for financial year 2021-22, along with setting a glide path to reduce it to 4.5 per cent by financial year 2025-26. The government cited an unprecedented adverse shock to the economy in 2020-21, inflicted by the Covid-19 pandemic, as the reason for changing its fiscal projections, for which the government will now amend the Fiscal Responsibility and Budget Management (FRBM) Act.
This marks a sharp departure from the earlier fiscal deficit projection of 3.3 per cent of GDP for 2021-22. Fiscal deficit for 2020-21, earlier estimated to be 3.5 per cent of GDP, has now been sharply revised upwards to 9.5 per cent of the GDP.
Finance Minister Nirmala Sitharaman, in her Budget speech, said the government intends to achieve the fiscal consolidation roadmap by increasing the buoyancy of tax revenue through improved compliance and receipts from monetisation of assets. “We plan to continue with our path of fiscal consolidation, and intend to reach a fiscal deficit level below 4.5% of GDP by 2025-2026 with a fairly steady decline over the period. We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and, secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land,” she said.
Higher spending for an economy, impacted by the economic slowdown and the aftermath of the pandemic, resulted in a higher fiscal deficit. The government’s total expenditure in 2021-22 is projected to rise by 0.95 per cent from this fiscal’s revised estimate and 14.5 per cent from the Budget estimate to Rs 34.83 lakh crore. Of this, the government’s capital expenditure is projected to rise to Rs 5.54 lakh crore in 2021-22 from Rs 4.39 lakh crore in the revised estimate for this fiscal.
“Our fiscal deficit, which started at 3.5 per cent in February 2020, has gone to 9.5 per cent of GDP. So we have spent, we have spent and we have spent. Otherwise our fiscal deficit would not have reached this number…we have also given a clear glide path for deficit management and to bring it down,” Sitharaman told reporters after the presentation of the Budget.
Fiscal expansion over next financial year
The government has set a glide path to reduce fiscal deficit to 4.5 per cent of GDP by FY2025-26, after opting for fiscal expansion for the next financial year. Fiscal gap for FY22 is now seen at 6.8 per cent — a sharp departure from the earlier projection of 3.3 per cent.
The financing of fiscal deficit is going to be mainly done through higher market borrowings, disinvestment and receipts from the indirect taxes including import duties and cess. Net borrowing is estimated to come down to Rs 9.67 lakh crore for next fiscal from Rs 12.73 lakh crore estimated for the current fiscal.
Following the Budget announcement, the yield on the 10-year benchmark government security rose 15 basis points to closeat 6.09 per cent.
The projections on the revenues side have also factored in a tax buoyancy of 1.6 times in direct taxes. Gross tax revenues are expected to rise by 16.7 per cent, mainly due to a projected increase of 22 per cent in direct taxes. The government expects to collect about Rs 30,000 crore from the new levy of Agriculture Infrastructure and Development Cess.
Economists said the conservative nominal GDP estimate in Budget, which is 14.4 per cent as against 15.4 per cent outlined in the Economic Survey, is likely to help improve the fiscal deficit number going ahead. “With growth estimates being more conservative than the Economic Survey projected, there is a likelihood that the deficits might improve vs those outlined in the Budget. Additionally, revenue assumptions might also pose some upside, especially the FY21 numbers, in light of higher indirect tax collections in 2HFY21,” said Radhika Rao, economist, DBS Group Research.
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