Union Budget 2021: FM Nirmala Sitharaman strikes balance between fiscal prudence and growthFebruary 5, 2021
By N Sivaraman,
Indian Union Budget 2021-22: The uncertainty generated by the Covid-19 pandemic had created exceptionally elevated expectations from the annual budgeting exercise. In this backdrop, the Union Budget for 2021-22 has turned out to be well-articulated. Its unwavering focus on enhancing the outlays for health as well as infrastructure are commendable, and have been greatly appreciated.
Simultaneously, the Budget has confirmed an unavoidable fiscal slippage. Although the size of the same has overshot our expectations, it has been driven in part by the transparent accounting towards food subsidies, which can’t be faulted.
The Union Budget revealed a clear pivot towards the critical sectors of health and infrastructure. The increase in health spending, especially towards the vaccine, will be a sentiment-booster for the economy and economic agents, helping instil confidence to get back towards pre-covid normalcy.
Moreover, the increase in capital spending has exceeded our projections, and should spur a virtuous cycle of job creation, income growth, and less-fearful consumption. This should help the economy exit from the pandemic and associated recession on a surer footing. Nevertheless, the timely implementation of the Budget proposals will be key to ensure a higher growth potential of the Indian economy over the medium term.
At the same time, there has been a huge increase in the allocation towards food subsidy for the current year. Relative to the Budget Estimate (BE) of Rs 1.2 trillion for FY2021, the Revised Estimates (RE) have indicated a massive increase to Rs 4.2 trillion. This has both been driven by the large costs related to the free foodgrain programme that the government had undertaken to ensure food security during the pandemic, as well as the prepayment of a loan that had been taken by the Food Corporation of India (FCI) from the National Small Savings Fund (NSSF).
Subsequently, food subsidies have been pegged at a lower Rs 2.4 trillion in FY2022 BE, although this remains significantly larger than the actual release of Rs 1.1 trillion in FY2020.
The budgetary allocation for the subsidy for the fertilizer sector for FY22 has been pegged at around Rs 0.8 trillion, a step down from the Rs 1.3 trillion included in FY21 RE. As per Icra’s estimates, the FY22 BE is inadequate to meet the fertilizer sector’s requirement, which we project at around Rs 0.9 -1.0 trillion. However, the allocations for the fuel subsidy for FY21 RE and FY22 BE appear to be adequate.
In terms of the key fiscal balances, in its Budget Estimates (BE) for FY21, released in February 2020, the government of India (GoI) had pegged its fiscal deficit at Rs 8.0 trillion (3.5% of GDP). The Revised Estimates (RE) for FY21 have indicated that the fiscal deficit would exceed the BE by a substantial Rs 10.5 trillion, led by the downward revision in tax revenue and disinvestment receipts, as well as higher revenue and capital expenditure. Accordingly, the fiscal deficit of the GoI has widened to 9.5% of GDP in the RE for FY21, relative to the budgeted target of 3.5%.
The higher outlay towards food subsidy is one of the main reasons why the GoI’s revised fiscal deficit in FY21 has turned out to be much higher than what we expected (7.5% of GDP).
The BE for FY2022 indicates a decrease in the fiscal deficit to Rs 15.1 trillion or 6.8% of GDP from Rs 18.5 trillion in the RE for FY21. This fiscal correction is basically driven by revenue normalisation. Nevertheless, the size of the fiscal deficit budgeted for FY22 exceeds our earlier projection (5.0% of GDP), on account of higher capital spending and food subsidy.
The estimates made by the GoI for net tax revenues and non-tax revenues, both in FY21 RE as well as FY22 BE, appear to be credible, and in line with expected nominal GDP growth of 14-15% for the coming fiscal year. However, the achievement of the substantial disinvestment target for FY22, will remain contingent on whether the market conditions permit the completion of the planned transactions in a timely manner.
On a somewhat sombre note, the glide path for the correction in the GoI’s fiscal deficit, which entails a gradual reduction to below 4.5% of GDP by FY26, appears to be back-ended, and more modest than expected, which is a matter for some concern over the medium term.