Finance Minister Nirmala Sitharaman To Present Union Budget At 11 A.MFebruary 1, 2021
Spending Vs Deficit: A Tightrope Walk
Most economists are unanimous in their view that India needs to prioritise growth by spending more. The Indian government needs to stimulate growth and push for job creation through a spending boost. Credit Suisse’s Neelkanth Mishra noted that the government is also willing to spend more as most Covid-19-related restrictions have been removed. This would mean that the growth multiplier for every spent would be higher now, it said.
Conventional wisdom, however, would suggest that higher spending can lead to a wider fiscal deficit. But nothing about this year’s budget is conventional. J.P. Morgan’s Sajjid Chinoy and Toshi Jain, in a recent note, argued that it is possible for the government to deliver a budget that expands spending while simultaneously reducing the headline budget gap.
India’s relief package during the Covid-19 pandemic has been relatively small compared to other countries. And low fiscal spending has its costs, according to HSBC Global Research. “Low fiscal spending could leave behind other scars like inequality, which in turn could hurt the sustainability of growth,” it said. The budget can prioritise on fixing that.
Still, the government will need to keep long term debt sustainability in mind. With the country’s debt-to-GDP ratio likely to hit close to 85% in FY21, an attempt will need to be made to bring that down. That means a steady decline in the fiscal deficit will need to be targeted. The budget gap in the ongoing fiscal is expected to rise to 6.5-8% of the GDP. For the next fiscal, the government is expected to target for a deficit of around 5.6%, according to consensus of estimates.
This will mean, according to a median forecast of 15 analysts surveyed by Bloomberg, the government could announce a borrowing plan of Rs 10.6 lakh crore. That’s lower than the record Rs 13.1 lakh crore in this fiscal, but 75% above the previous five-years’ average.
Over the last few years, Prime Minister Narendra Modi’s administration has been trying to conduct asset sales of state-run companies with a broader objective of more privatisation in the economy. And as the budget gap has widened, the divestment targets have become lofty to make up for that deficit. In last year’s budget, the government set a divestment target of Rs 2.1 lakh crore. So far, it has only been able to garner Rs 19,499 crore.