Quickonomics
February 5, 2021
Expenditure has caught up to the trend
The shift in math Rs lakh crore
The budget for next fiscal offers a new 40.0
spreadsheet for growth, assuming the pandemic
is on its last legs in India. 30.0
20.0
Reading these numbers against the pre-
pandemic trend can tell us what to look for in the
10.0
tricky triangulation of growth, inflation and yields
ahead.
0.0
FY16 BE FY17 BE FY18 BE FY19 BE FY20 BE FY21 BE FY22 BE
Essentially, the budget replaces fiscal
consolidation as a priority with expansion, well Total expenditure – trend Total expenditure – BE
into the medium term. The fiscal glide path itself
has become footloose – with fiscal deficit at Notes: BE = budget estimate
9.5% for fiscal 2021, 6.8% targeted in the next
and 4.5%, by fiscal 2026.
..helped by a greater focus on capex
Why the deficit surge
40.0 Rs lakh crore
One obvious reason is, in a pandemic year, 30.0
expenditure couldn’t be held back too long and
has caught up with trend. But revenue has not. 20.0
This divergence is expected to hold for the next
fiscal too. 10.0
0.0
The other is more ‘reformist.’ The budget reduces FY16 BE FY17 BE FY18 BE FY19 BE FY20 BE FY21 BE FY22 BE
dependence on extra-budgetary resources
(bonds fully serviced by the government, NSSF
Revenue expenditure – trend
loans, among others) and rather spend from the
budget, ushering in greater transparency. Revenue expenditure – budget estimate
Capital expenditure – trend
The widening expenditure-revenue gap Capital expenditure – budget estimate
• The Centre has spent enough so as to lead
budgetary expenditure close to the pre- But receipts* have fallen way short…
pandemic trend this fiscal and most likely
Rs lakh crore
fully catch up in the next (see chart on the 30.0
right). Not only that, the quality of expenditure 25.0
is improving, with capex rising and revenue
20.0
expenditure staying below trend
15.0
• Receipts, on the other hand, are estimated to 10.0
remain 27% below the trend in fiscal 2022. To 5.0
be fair, this also partly reflects the somewhat
conservative revenue targets for fiscal 2022. 0.0
FY16 BE FY17 BE FY18 BE FY19 BE FY20 BE FY21 BE FY22 BE
Receipts – trend Receipts – budget estimate
*Sum of tax (net to Centre), non-tax and non-debt capital receipts
Research
Research
• Government revenue, particularly tax collec- ..largely on account of lower GDP size
tions, go up due to either base effect or rate ef-
fect. Nominal gross domestic product (GDP) in 300.0 Rs lakh crore
fiscal 2022 is estimated at 10% below the trend
seen before the pandemic. The government, for 250.0
good reasons, has also not introduced tax pro-
200.0
posals. Thus, while the base has shrunk, rates
have not changed. This will lead to underper- 150.0
formance of revenue continuing beyond fiscal
2022, unless compliance goes up substantially. 100.0
50.0
More transparency
0.0
• Hitherto off-budget expenditures such as Food FY16 BE FY17 BE FY18 BE FY19 BE FY20 BE FY21 BE FY22 BE
Corporation of India’s loans from the Nation- Nominal GDP – trend Nominal GDP - actual
al Small Savings Fund and government fully
serviced bonds will now get accounted for
when calculating the fiscal deficit. Excluding
these two items, fiscal deficit could have been ..which shoots up the fiscal deficit
lower by 0.5-1.0% in fiscal 2021 and ~0.6% in Rs lakh crore
20.0
fiscal 2022. That is to say, in the more transpar-
ent schema, the fiscal consolidation path may
15.0
stretch longer.
10.0
What does this imply for macroeconomic
management? 5.0
1) Growth: The thrust on public investment will 0.0
be positive for growth, not only in the short FY16 BE FY17 BE FY18 BE FY19 BE FY20 BE FY21 BE FY22 BE
but also the medium term as it has a higher
multiplier effect than revenue spending and Fiscal deficit – trend Fiscal deficit – budget estimate
augurs well for jobs.
2) Inflation: A large fiscal deficit could be Never-seen-before fiscal deficit (% of GDP)
inflationary but given there are underutilised
capacities and the economy continues to grow 10
below potential, this may not be an immediate
threat. But sticky inflation, especially core, 8
and surplus liquidity sloshing around can
potentially breed trouble. 6
3) Yields: G-sec yields are expected to come 4
under pressure as the market borrowing
programme remains huge. Since the central 2
bank plans to stay accommodative, it would
also need to keep a close tab on yields, using a 0
broad range of tools as it has been doing so far FY16 FY17 FY18 FY19 FY20 FY21 BE FY21 RE FY22 BE
Source: Ministry of Finance, CRISIL
Analytical contacts
Dharmakirti Joshi Adhish Verma
Chief Economist Senior Economist
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