Decoding the Budget 2021-22 . ‘We are prepared to do what we think is right’

No. It is not that we are going to be very careless about fiscal deficits and push for growth without reference to fiscal constraints or that fiscal prudence is not going to be practised. It is a change from the sort of religious orthodoxy of a specific man-made number of 3 per cent which did not have either a scientific or a religious basis. So that is perhaps not going to be there, but I think the government will continue to be fiscally prudent.

What you are seeing today is the government recognises that there’s a lot of unused capacity in the economy; a lot of people are in need of work and businesses are working under capacity both in the goods and the services sectors of the economy. Therefore, this is a time when the prudent thing to do is to spend public funds to revive economic growth and to spend it in a manner where we are able to create as many unskilled and semi-skilled jobs as possible to provide relief to those in the informal sector. Therefore, in the present context, we think that the tolerance for fiscal expansion is higher than it would be in a different circumstance.

But certainly, it is not to say that it’s a philosophical shift where we don’t pay any regard to the extent of the fiscal deficit. We should certainly not repeat the experience of what happened between 2009 and 2012, and we are acutely conscious of those lessons.

Three per cent is a man-made number, it’s more of a rule of thumb and it had perhaps acquired an overstated level of sanctity. So, to focus on one figure for the fiscal deficit regardless of what is happening in terms of cost of borrowing and GDP growth is perhaps not the approach that we will take in future.

The Finance Minister did mention in the Budget speech that we would be coming forward with a revised approach to the FRBM and that will happen. We are not sticking to 3 per cent and we will not be reaching 3 per cent even by 2025-26.

Our intention is to go below 4.5 per cent. So yes, the rigid adherence to a prefixed number regardless of circumstances has been given up and that’s a fact. We will have to keep in mind the debt trajectory of the country, the prevailing rate of GDP growth, the inflationary effects of high public spending, all of which will be factors that will go into deciding the appropriate level of fiscal deficit.

The debt-to-GDP ratio will certainly be higher than 60 per cent. In fact, much higher than that. Whether debt-to-GDP is an indicator that should guide us in the years to come is also a matter under examination. The figure of 60 per cent has no science behind it. So yes, debt-to-GDP ratios are going to rise substantially, particularly in 2020-21 because it’s a year when deficits are at a record high and GDP growth is at a record low.

This year, we will be in excellent company because we will not be the only country that is going through this. Next year, I think growth will be back, inshallah, assuming no recurrence of pandemic, and there’ll be a compression in the debt-to-GDP ratio as would see a nominal GDP growth of perhaps 14 per cent. So, overall, we will be improving our debt-to-GDP ratio starting next year.

We hope to handle them in two ways. One, this year there is more understanding of our situation because we are not alone. All international economies are going through the same circumstances, running record fiscal deficits and monetising their deficits. I think we are not too badly off in relative terms.

Two, as you may have seen from the Economic Survey, we are also prepared to do what we think is right and then be judged for that, rather than be constrained in what we do by what they might or might not think. I think that the rating agencies, if they properly understand what we are doing, are unlikely to be too alarmed.

Yes, the philosophy is definitely opposite to the vociferously made argument by very credible people, especially those outside India or Indians from outside India. It is one way of stimulating demand. It has some merit, but it has some demerits too. I’ll explain why we have done. You can look at studies which have tried to estimate fiscal multipliers for India. In terms of the growth effects of government capital expenditure versus government revenue expenditure, there’s no dispute that capital expenditure produces a much bigger bang for the fiscal buck in terms of its effect on GDP growth. So that’s on the growth side. On the equity and distribution side, there are people who are suffering, and they need relief. So, our approach has been to adopt Antyodaya approach.

The people who are the weakest and the most vulnerable we took care of in a series of packages starting from March 26 with free food, free gas cylinders, money in Jandhan accounts. For businesses, we took the approach of credit through guaranteed credit under the ECLGS; so it was a sort of safety net for the weakest and for affected businesses. I’m not dismissing the argument of cash in the hands of people.

It was our conclusion that given the difficulties of targeting it properly and the absence of a clear plumbing structure or pipeline through which benefits would reach those for whom it was intended, and given that the growth effects of such spending would be much slower and lower than the growth effects of capital spending and given the fact that the kind of capital spending that we are promoting has a very large employment effect on the semi-skilled and the unskilled, we felt that on balance this was the better approach to take. I admit to you that there is more than one approach that could be taken. We very carefully decided to take this approach.

It would have been considerably lower. Without the clean-up, it would have been lower by about 0.8 per cent. So, the deficit would have been about 8.6-8.7 per cent.

We started at ₹30.42-lakh crore and ended at ₹34.53-lakh crore. If you take ₹30.42-lakh crore plus, about ₹4.5-lakh crore of packages which gives you about ₹35-lakh crore and another ₹1.5-lakh crore of subsidy correction, we should have been at about ₹36.5-lakh crore. Instead, we have ended at ₹34.5-lakh crore because we actually made a lot of cuts in expenditure (₹2-lakh crore).

Any large borrowing program has some influence on yields. If that did not happen, one would suspect that the market was inefficient. So, it’s obvious then we have announced ₹80,000 crore of additional borrowing this year, which was not predicted by the markets, especially because most market analysts thought that we would not even spend the Budget estimate of ₹30.42-lakh crore.

I don’t think there’s going to be any crowding out because it is not as if there is a huge amount of demand for funds for productive purposes from the private sector at this moment. In fact, if that were the case, we would not need to inject so much of the stimulus into the economy. So, I don’t think crowding out is a question. I think there may be some impact on borrowing costs but I think that is more than offset by the growth impulse that we are imparting with the stimulus.

First let me answer the numerical part of the question as to why allocation is going down. If you look carefully at the Budget estimates for this year and that for the next year, the number is going down. If you look at the revised estimates for this year, they are much lower than next year’s Budget estimates.

The reason for that is, this year, many of the nutrition programs couldn’t function because of the pandemic. In 2017, after the winding up of the Planning Commission, the Ministry of Finance had put out a guideline that, hereafter, schemes would be evaluated at the end of each financial commission cycle and they would have an external evaluation after which they would be restructured.

So, evaluations were done this year and as a result of which the Department of Nutrition has decided to restructure the schemes into more flexible schemes. We are not happy with the nutritional outcomes. We need to do better and, in an effort, to do better, those schemes are being restructured. However, if we find the need for more money in areas like nutrition during the year and if it can be usefully spent, we will be happy to allocate more.

The defence budget has three elements — defence services revenue which is predominantly salaries of the armed forces and revenue expenditure like fuel and maintenance. Then there’s a defence services pensions and defence services capital. The first two had a lot of arrears of pay commission payments both of salaries and pensions. Those arrears are not required next year. So, next year, both the defence services revenue and the defence services pensions are lower. As far as the capital outlay is concerned, it is the highest budget-to-budget increase in capital outlay in 15 years.

COMMENT NOW