Reduce fiscal deficit to 5% of GDP in FY22 Budget: Shankar Acharya2 min read . Updated: 11 Jan 2021, 10:22 PM IST
- The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years
Government should use the revenue buoyancy and pick up in GDP growth in FY22 to bring down the level of cleaned up fiscal deficit that includes extra-budgetary spending to around 5% of GDP in its upcoming Budget, failing which there could be a rapid increase in inflation, India’s former chief economic adviser in the finance ministry Shankar Acharya cautioned on Monday.
“Getting to 5% (of GDP) fiscal deficit is feasible, not difficult and desirable because if you don’t do that, you leave this large debt growing sharply in the succeeding years as well. That will strain the credibility not just of our creditors but it will bring into question our ability to manage inflation credibly without doing effectively much more RBI financing of the deficit indirectly and that is real danger.
Reducing deficit will allow your borrowing programme to be in much more reasonable territory in the next year and will not create the massive liquidity expansion that we have seen. This year it has been fine because your output levels have been low, but next year you will see much more spillover to inflation if you don’t manage to reduce deficit," Acharya said while speaking at a Mint pre-Budget webinar on the topic “Reviving India’s covid-hit economy".
Acharya’s views run counter to the general consensus view among most economists that government should not withdraw its fiscal support to the economy in the upcoming Budget and should rather relax the fiscal deficit further to support the nascent economy recovery.
Throughout 2020, Acharya said, he felt the discussion surrounding larger fiscal stimulus a little bit “overdone if not meaningless" because falling revenues were providing an automatic stabilizer to the economy. “Expenditure stays sticky and when you have a revenue collapse, you have a large fiscal deficit. You were getting a huge fiscal stimulus from rising fiscal deficits, essentially out of the automatic stabilizer of deficit rising because revenues were collapsing even though there is no massive change on the expenditure side," he added.
The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years with National Statistical Office assuming 0.6% growth in the second half (October-March) of FY21. What will impact budget calculations, especially fiscal deficit, is the nominal GDP estimate of 4.2% contraction against 10% expansion assumed in the FY21 budget. India’s nominal GDP is projected at ₹194 trillion instead of ₹224 trillion assumed in the Budget.
In FY22, Acharya said, real GDP growth will be anywhere between 8-11% without doing further policy changes of any major kind. “If you take a median projection of something like 6% inflation as measured by the GDP deflator, you get something like 15-16% increase in nominal GDP straightaway. Effort should be made to use quite a lot of that increase to bring down the centre’s cleaned up fiscal deficit of somewhere between 7-8% of GDP to 5% of GDP next year which by the way is roughly what has been last year and two years before that if you look at cleaned up deficit and not what is shown. And leave further consolidation to later years and maybe you announce a glide path or you don’t. I don’t think policy wise in the short run that is important," he added