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(Clockwise from above) Planning Commission ex-deputy chairman Montek Singh Ahluwalia, former CEA Shankar Acharya and JP Morgan chief India economist Sajjid Z. Chinoy.
(Clockwise from above) Planning Commission ex-deputy chairman Montek Singh Ahluwalia, former CEA Shankar Acharya and JP Morgan chief India economist Sajjid Z. Chinoy.

‘Be transparent about fiscal deficit’

The finance minister has the perfect opportunity to come clean about off-budget spending and reveal the true nature of Centre’s finances, say experts

Budget presentation amid the pandemic gives a great opportunity for finance minister Nirmala Sitharaman to be transparent about off-budget spending and reveal the true nature of the government’s fiscal deficit, eminent economists said at Mint’s Road to Recovery series webinar in the run-up to the Union Budget scheduled for 1 February.

“It is time to come clean," former deputy chairman of the Planning Commission Montek Singh Ahluwalia said, adding that the Centre should be upfront about off-budget spending. “The Centre’s fiscal deficit could be 6.5% plus, to which off-budget items should be added, and it could easily come to “between 7% and 8%".

“The tendency to defer paying bills which results in reduced expenditure was not the right thing to do. For the next fiscal, the bounce-back in revenue may not be sufficient and the government could take many more specific steps to boost revenue receipts," Ahluwalia added.

In an hour-long webinar, Ahluwalia, along with other experts, Sajjid Z. Chinoy, chief India economist, JP Morgan and former chief economic adviser in the finance ministry Shankar Acharya, shared their views on the single biggest issue that confronts the country: ‘What we must do to revive our covid-crunched economy’.

The Indian economy is officially projected to contract by a record 7.7% in FY21, with the National Statistical Office assuming 0.6% growth in the second half of FY21. What will impact Budget calculations, especially fiscal deficit, is the nominal GDP estimate of 4.2% contraction against the 10% expansion assumed in the FY21 Budget. India’s nominal GDP is projected at 194 trillion instead of 224 trillion assumed in the Budget.

Acharya said in FY22, real GDP growth will be anywhere between 8-11% without doing further policy changes of any major kind. “Effort should be 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% next year which is roughly what has been last year and two years before that if you look at the cleaned-up deficit and not what is shown. And leave further consolidation to later years, and may be you leave a glide path or you don’t. I don’t think policy-wise in the short run that is important," he added.

Taking a contrarian view, suggesting fiscal consolidation at a time most economists have suggested providing further fiscal stimulus in the upcoming Budget, Acharya said getting to 5% fiscal deficit is 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," he said.

However, Chinoy advised against aggressive fiscal consolidation, supporting greater government support for the nascent economic recovery.

“Under the assumption that the economy will make a gradual recovery next fiscal, I am not sure the central bank will have to intervene and buy a lot of government debt because we project the current account to be flat and the balance of payments to be in a surplus. So, we will have this domestic liquidity sitting in the banking system and banks are going to be averse to giving credit strongly, we could be in a situation where the fiscal deficit is financed largely without any expansion of central bank’s balance sheet. The RBI, anticipating this, has become confident in withdrawing some of the rupee liquidity," he said. “Given the state of the private sector, we could be in a bit of a sweet spot next fiscal where you can have an expansionary fiscal impulse and yet, RBI will not be forced in financing the bulk of it," he said.

Chinoy said that he expects the Indian economy to see a contraction of 6.5% in the current fiscal, lower than the government’s latest projection of 7.7% factoring in the recent upturn in economic activities. “So, we actually are a little bit more hopeful than the NSO’s estimate because that was based on patterns till October and two things have changed since. One is since November there has be a big pick-up in government spending. We don’t have the number but if you look at the liquidity pattern, this is another strong month of government spending. There seems to be a conscious change in the strategy. For the next six months, there will be stronger government spending, in particular, capital expenditure," Chinoy said.

However, Ahluwalia said the latest NSO projection of a 7.7% GDP contraction in the current fiscal assumes a huge increase in government consumption expenditure.

“But we must know that figures after October do not show that. If you want to limit the contraction to 7.7%, that implies an expenditure boost in the rest of the current year. The finance minister in her statements has said she was going to spend without too much regard to what it would do to the fiscal deficit in the current year. I think that is correct. We have to see how the Budget numbers come out," Ahluwalia said.

Both Acharya and Ahluwalia supported the idea of keeping the coronavirus vaccination free of cost for everybody. “The vaccination drive which of course will go on more than one year should be funded completely and money should not be the issue. If you are finding raising money difficult, I wouldn’t have a problem with a cess possibly a sharable one (with states) which will be levied on income taxes but is removed after two years and is totally earmarked for vaccination and public health requirements," Acharya suggested.

Ahluwalia suggested that there were things the finance minister could do on the tax front in the Budget as well as outside. For example, she could take proposals to the GST Council for reforming the indirect tax system. “The finance minister could take the proposal for a massive simplification of GST to the GST Council and do what the experts are saying would be the way to get more revenues. And in addition to that is asset sales," he added.

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