Wednesday, Oct 05, 2022

The fiscal situation will not stabilise in 2020-21 unless consumption improves

The Union budget should focus on enhancing credit flows to the small and marginal farmers, increase investment in health and education.

It is now perhaps the right time to allow banks and infrastructure financing companies be allowed to raise tax free bonds. (Illustration by C R Sasikumar)

The first advance estimates of GDP for 2020-21 are much better than the earlier market consensus and shows the inherent strengths of the Indian economy. The economy is expected to contract by 7.7 per cent implying a COVID-19 induced loss of Rs 9.61 lakh crore in real terms for the year. Nominal GDP is expected to contract by 4.2 per cent. The figures continue to have a considerable band of uncertainty as data challenges remain.

The demand side, however, continues to be in a soft spot with private consumption falling by 9.5 per cent and its share in the overall GDP reducing by full 100 basis points. Per capita private consumption has contracted by 10.4 per cent, while capital formation has contracted by 14.5 per cent, with imports and exports also contracting. Only government consumption remains in positive territory.

The deep contraction in manufacturing (9.3 per cent), construction (12.6 per cent) and trade, hotels (21.4 per cent) are the main pain spots. The estimated losses in these three sectors account for 93.5 per cent of the total loss for the whole year. With high employment intensity, the task of rehabilitating displaced business in these sectors will be a long-drawn battle. The financial sector has somehow weathered the storm and the value added by the sector has registered a nominal growth of 1.4 per cent.

With these mechanics in play, it is imperative that the budget pays careful attention to how numbers will play out. The budgeted growth in nominal GDP will be crucial for the budgeting exercise, and needs to be the primary focus. The fiscal situation will not stabilise in 2020-21 unless consumption improves.

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What should be the growth in nominal GDP for 2021-22? In terms of specific numbers, the average growth in nominal GDP for the decade ending in 2013-14 was 15 per cent, but the average GDP deflator at 7.6 per cent far outpaced average real GDP at 6.8 per cent. Now contrast this with the post 2013-14 period: For the six year period ending in 2019-20, average nominal GDP growth was 10.4 per cent, with real GDP growth of 6.8 per cent far outpacing the GDP deflator at 3.6 per cent. We can thus safely assume a 15 per cent nominal GDP growth in the 2021-22 budget as it should be driven more by real GDP growth and not inflation — our perennial bugbear pre 2014. It is thus extremely important that we ensure that the current inflation trajectory that is showing signs of stubbornness in terms of service inflation is kept under control through policy interventions like rationalisation of fuel taxes that are currently at record highs.

Coming to the specific numbers, if we look at receipts post the 2008 crisis, they grew by more than 20 per cent and we expect revenue receipts to grow in excess of 20 per cent in the 2021-22 budget too, with non-tax revenue posting a likely 50 per cent growth. A simple back-of-the-envelope estimate suggests that the budgeted fiscal deficit (below which it should not be set) could be ideally at 5.5 per cent in the budget.

Regarding specific policy interventions, we are tempted to announce specific recommendations for the agriculture sector that could see significantly enhanced credit deliveries to the small and marginal farmers in the budget.


First, out of the outstanding bank credit of about Rs 12 lakh crore to the agriculture and allied activities sector, Rs 7 lakh crore is for Kisan Credit Cards (60 per cent of the total). The KCC portfolio of banks has come under increasing stress over the years due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product. Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention. It is proposed that for renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakh, the payment of interest must be a sufficient condition for renewal as with other loans. The above measure has the potential to reduce the credit cost for banks considerably on KCCs as NPAs can be prevented more easily and the interest rate on KCC loans can be further reduced.

Second, there are 11.5 crore farmers who are PM-KISAN beneficiaries — 6.5 crore farmers have KCC. Thus, the remaining 4-5 crore could be land owning cultivators and at least 3-4 crore of such could be tenants/lessees/landless. Currently, such tenant farmers are not formalised into the credit deliveries of scheduled commercial banks. As of now, it requires state interventions for tenancy certificates which is only available in Andhra Pradesh. We propose the formation of a SHG model under the Deen Dayal Antodoya Yojana. The formation of SHGs will formalise tenancy even without formal documentation of tenancy and this will enable formal lending to take place to three crore landless farmers. The government could offer a sweetener for the formation of these types of SHGs that might require only a very nominal fiscal outlay. For example, even a Rs 1,000 outlay for three lakh SHGs could mean only Rs 30 crore fiscal support.

Third, the government must use this opportunity to increase investment in health and education. For health, it could introduce a medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy. For the record, the size of the health insurance is Rs 32,000 crore and the savings bank interest is Rs 1.15 lakh crore. The government should also consider exempting all retail and health insurance products from GST.


Fourth, the government can tweak the savings scheme for senior citizens by offering them tax concessions, the fiscal impact of which could be negligible. This will be fair and equitable in a declining interest rate regime.

Given the significant increase in financial savings of households, it is now perhaps the right time to allow banks and infrastructure financing companies to raise tax free bonds (preferred tenor 15-20 years), and/or tax paid bonds to tap funding from retail investors, wherein the tax on the interest income of such bonds could be paid by the bond issuer — a 10 per cent tax deducted at source under section 193 of the income tax act. Such a structure while being attractive to retail investors will also ensure that the government is not losing on its tax revenue.

The scale of the humanitarian crisis after COVID-19 is such that individual philanthropy must pitch in to supplement the role of government. There must be genuine redistribution of resources. Hence, can we not think of echoing the concept of Jan Bhagidari to public goods to propose a scheme called “Adopt-a-Family”. Under this scheme, which is purely voluntary, a taxpayer (probably with an annual income of Rs 10 lakh or more) can be incentivised through tax deductions to adopt a BPL family for a year that could potentially benefit at least 2.8 million people.

Three suggestions on the fiscal situation (borrowing from my good friends): First, withdraw all tax appeals, second, accept all domestic arbitration decisions against government departments/agencies and third, clear all outstanding dues to all parastatal agencies within a stipulated time. This will be a milestone structural administrative change that could be even thought of as a one-time balance sheet entry recognising liabilities and paying them off. As a consequence, we could jump multiple positions on the Ease of Doing Business rankings. And it could also serve as a fiscal lubricant.

Lastly, could we not also use this opportunity to unleash the power of public sector banks by deciding to reduce the government’s stake in them to 51 per cent, just to begin with?


This article first appeared in the print edition on January 14, 2021 under the title ‘A budget for our times’. Ghosh is group chief economic advisor and Parida is economist, State Bank of India. Views are personal.

First published on: 14-01-2021 at 03:00:48 am
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