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Story of Budget 2021, in 9 charts

Nirmala Sitharaman, India's finance minister, gestures as she speaks during a news conference in New Delhi, India, on Monday, Feb. 1, 2021.  (Bloomberg)Premium
Nirmala Sitharaman, India's finance minister, gestures as she speaks during a news conference in New Delhi, India, on Monday, Feb. 1, 2021. (Bloomberg)

The Union government has finally stepped on the gas when it comes to spending. But after a temporary splurge in the rest of this fiscal year, the finance ministry will tighten its purse strings to bring down debt levels, the budget numbers suggest

Even as countries across the world raised spending aggressively to counter the economic impact of the covid-19 pandemic, India had remained an outlier. Throughout the pandemic, the finance ministry has argued for small doses of incremental spending to sustain the economic recovery rather than a big-bang boost. The Union budget on Monday marked a shift in fiscal stance for the first time, but only a partial one.

After budgeting for a heavy ramp-up in spending for the remaining months of the fiscal year, the finance ministry expects to tighten spending in the year ahead. Overall government expenditure is estimated to shoot up 28% in fiscal 2021 and fall drastically to 1% in fiscal 2022. The cuts are being borne largely by the social sector. The share of Union spending on health, education, and rural development ministries will be lower in the upcoming fiscal year than in the fiscal 2015-2021 period.

There is however a concerted move now to improve the quality of spending, with a greater focus on public investments. The unanticipated pandemic year cost the Centre an estimated 34.5 trillion, significantly higher than the budgeted 30.4 trillion. Even though this is budgeted to remain flat for the next fiscal, capital spending by itself is pegged to rise 26% to 5.54 trillion. In fiscal 2022, the government has budgeted nearly 16% of its expenditure on capital assets.

Source: Budget Documents
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Source: Budget Documents

In the ongoing fiscal year, growth in capital spending is largely geared towards core capex projects (such as roads, rail, power projects etc.). In fiscal 2022, spending on social capex (hospitals, schools, drinking water systems etc.) is expected to lead growth in public investments.

At a time when revenues have dried up, even a limited fiscal stimulus has bloated the public debt to GDP (gross domestic product) ratio, with the fiscal deficit reaching 9.5% of GDP, the highest levels in at least five decades.

A part of the increase in the deficit is because the government has recognized off-budget liabilities such as subsidy payments to the Food Corporation of India (FCI). The rise in food subsidy payments budgeted for the current fiscal accounts for 41% of the Rs7.6 trillion rise in central government expenditure. In fiscal 2022, overall spending is expected to go up only 1% compared to current fiscal levels. But adjusting for the food subsidy bump this year, the spending hike amounts to an 11% jump for the next fiscal.

The muted increase in spending for the next fiscal is aimed to cap the public debt-GDP ratio, among the highest across emerging markets.

Some amount of deft fiscal management has also helped the government limit the debt bulge. The post-pandemic hike in fuel taxes is expected to cushion the fall in other sources of revenues this year, with the share of such taxes in overall revenues rising to their highest level in two decades.

In a pandemic year, with urban migrants returning en masse to their villages, the rural employment guarantee scheme was one key component of the government’s relief measures. A government that came to power criticizing the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) raised spending on the scheme to a historic high. But next year’s allocations have been brought down sharply once again. Compared to the MGNREGS spending in fiscal 2020, the spending in fiscal 2022 is only marginally higher in nominal terms. In inflation-adjusted terms, the outlay has actually declined since pre-pandemic levels.

The spending on health has increased 29% this fiscal, roughly in line with increase in overall spending. Next year, the health ministry’s budget will see an 11% cut. While the allocation for health and well-being has been raised for the upcoming fiscal, much of the increase has gone to funding the Jal Shakti ministry, which implements the government’s flagship drinking water and sanitation programs.

Apart from the increase in spending on Jal Shakti ministry, the government has also raised outlay sharply on the ministries of micro, small, and medium enterprises (MSME) and agriculture.

Source: Budget Documents
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Source: Budget Documents

Even as the share of the farm ministry has increased, the share of the rural development ministry has declined. While the share of health spending is expected to see a small decline, the same for education is expected to drop sharply in fiscal 2022 compared to the last few years.

Defence and interest payments typically take up a fixed share of the budget outlay every year. But this year has been different, with a tense standoff with China raising demands on the defence budget, and higher public debt levels putting pressure on interest payments. Yet, defence spending is budgeted to decline, largely because of the fall in defence pension payments. The share of interest payments in overall spending is expected to remain largely the same despite rising debt levels.

Transfers to states are estimated to rise to their highest levels in several years in the current fiscal, and are expected to remain elevated even in the next fiscal.

Despite the rhetoric of big spending in the budget speech, the finance ministry’s overall stance has remained conservative, the numbers show. The historic contraction in India’s economy has led to a relaxation of the old fiscal rules but the government seems keen to signal a continuing focus on macro-stability. The risk, if any, is that the fiscal stimulus may turn out to be inadequate to put the economy back on a sustained growth path.

howindialives.com, a database and search engine for public data, contributed to this piece.

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