Strategy of building sufficient buffers will help to secure budgetary targets: RBI Bulletin

A net fiscal impulse of 0.3 per cent of gross domestic product (GDP) will continue to operate in the economy till the end of 2022-23 despite the consolidation envisaged in the Budget, according to an article in the Reserve Bank of India’s monthly bulletin.

An IMF working paper has defined fiscal impulse as the change in the government Budget balance resulting from changes in government expenditure and tax policies

“The Budget for 2022-23 calibrates a thrust to growth with feasible rectitude, reflected in a moderation in the cyclically adjusted fiscal deficit.

“...The strategy of building in of sufficient buffers will help to secure the Budgetary targets set for 2022-23 and create headroom for dealing with global spillovers,” RBI officials said in the article “Union Budget 2022-23: Some Pleasant Fiscal Arithmetic.”

Going forward, debt reduction needs to assume prominence in the fiscal policy strategy, they added.

Referring to the fiscal impulse, the authors said: “It is now for private investment to respond and participate in the recovery.”

The officials’ calculations show that the benefits of the Budget’s infrastructure-first strategy will pay dividends for several years, peaking in 2025-26 — the year of the next milestone on the consolidation path.

Fiscal policy exit

The authors opined that fiscal policy exits from crisis modes are much more difficult than going in; in the case of pandemics, it is excruciatingly so.

“Exiting policy makers have to contend with the razor’s edge trade-off between cliffs and ramps. Too rapid and large a withdrawal of fiscal support risks pushing the economy over the cliff into a sharp downturn.

“On the other hand, the ramp effects of too gently sloped a withdrawal runs the risk of moral hazard, and the building up of pressure groups for delaying the withdrawal of policy stimulus,” the officials said.

The authors noted that the Budget for 2022-23 commences this journey of conflicting pulls by seeking to calibrate a thrust to growth with feasible rectitude.

Accordingly, the Budget has chosen to go with a reduction in the gross fiscal deficit (GFD) by 0.4 per cent of GDP on its path to taking it down to 4.5 per cent by 2025-26.

“While this reduction may be seen as modest and back loading the bulk of consolidation on to later years, it needs to be evaluated against what the economy can bear now and the slack it can pull in when the recovery is stronger, rooted and self-sustaining.

“Getting there hinges around a strong investment drive and that is what the Budget has sought to prioritise, while holding down revenue expenditure growth relative to historical precedent,” the authors said.

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