Budget 2022: A sub-par track record of fiscal consolidation; will it change?

On July 10, 2014, when the former finance minister late Arun Jaitley rose to present the first Union Budget 2014-15 of the BJP-led NDA government, he had mentioned that the Budget proposals were  only the beginning of a journey towards a sustained growth of 7-8 per cent plus over the next 3-4 years along with macro-economic stabilisation that included lower levels of inflation, lesser fiscal deficit and a manageable current account deficit.  

A lesser fiscal deficit as a percentage of GDP was one of the top items on his agenda. The lawyer-turned politician had also blamed the previous Congress-led UPA government for reducing the fiscal deficit by cutting the expenditure rather than by way of higher revenues. The fiscal deficit was 4.5 per cent of GDP in 2013-14. 

The previous UPA government did face a black swan event , the global financial crisis in 2008 , which actually pushed the fiscal deficit from a low of 2.5 per cent in 2007-08 to 6.2 per cent in 2008-09 and 6.6 per cent in 2009-10. The then finance minister Pranab Mukherjee had given a fiscal stimulus package of Rs 1.84 lakh crore, which was 3 per cent of GDP. 

When Jaitley took over as finance minister, the fiscal deficit was 4.5 per cent in 2013-14 and projected at 4.1 per cent for 2014-15. "My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17," said Jaitley in his Budget speech. There was a clear road map for foreign as well as domestic investors and the corporate sector for the government's commitment towards fiscal consolidation. 

But in the last decade , the fiscal deficit of 3 per cent of GDP , which is an acceptable figure, was never achieved. A higher fiscal deficit has implication on inflation as well as high interest cost for the government. The fiscal deficit of 3.5 per cent in 2016-17 was way above Jaitley's target of 3 per cent. The huge low oil price advantage was also wasted as the shortfall in the disinvestment and revenue proceeds were compensated by the low oil prices, as market prices of petrol and diesel prices didn't fall as much.

Another black swan event, Covid-19 in 2020 , had upset the target of reaching a fiscal deficit of 3 per cent of GDP by 2020-21 as per the Fiscal Responsibility and Budget Management (FRBM) Act. Due to the pandemic, the fiscal deficit ballooned to 9.5 per cent in the first pandemic year 2020-21. The government had to rollout the AtmaNirbhar Bharat package, including the liquidity support by the Reserve Bank of India (RBI), which was around Rs 2 lakh crores,  equal to 13 per cent of the GDP.

The finance minister Nirmala Sitharaman last year said that the government will continue with the path of fiscal consolidation, and intends to reach a fiscal deficit level below 4.5 per cent 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 monetization of assets, including Public Sector Enterprises and land," said the finance minister.

Given the not-so-encouraging track record of the past two governments in meeting the fiscal consolidation path, the market expectations are to see some tangible measures to follow the fiscal consolidation path of 4.5 per cent of GDP set by the government for 2025-26.

The economic research team of state-owned Bank Of Baroda expects the fiscal deficit at 7 per cent as compared to the Budget estimate of 6.8 per cent in 2021-22. They have cited a shortfall in disinvestment proceeds as the reason. 

HDFC Securities also believes that the fiscal deficit target for 2021-22 could exceed solely due to this shortfall despite the cushion available by higher nominal GDP growth (than expected). "In such a circumstance, Budget provisions will need to give the right signals to the Indian people and investors from abroad," it warns.

It further reasons that if one adds the state government deficit of 3.2-3.3 per cent of GDP, the combined fiscal deficit reaches a level of 10 percent. "This situation cannot continue for long.  The global credit rating agencies have given the benefit of a pandemic for India posting these wide deficits year after year," it adds.

Radhika Rao, senior economist and senior vice president at DBS Bank, Singapore, says that despite the higher spending demands in 2021-22, its reasonable to expect the Rs 2-2.5 lakh crore overshoot in revenues to help absorb the shortfall, apart from the government surplus cash position with the central bank and as well unspent balances with the ministries. 

"An additional cushion is from the higher nominal GDP of 0.3 per cent of GDP, which is likely to help keep the deficit within the budgeted 6.8 per cent of GDP," says Rao.

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