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Home / Opinion / Views /  Desist from an expansionary budget; go for modest, thoughtful spending hikes

Many economists want the Union Budget to nurse the pandemic-ravaged economy, reducing the focus on fiscal consolidation. Without more stabilization measures, the fledgling recovery may not sustain, some of these economists, including a few at the State Bank of India (SBI), have said.

But the finance ministry wants to keep the fiscal deficit within the target of 6.8% for FY22. It has in a memorandum asked departments and ministries to restrict their expenses within the allocated limits. They have been advised to seek additional funds only for unavoidable expenditure.

Should the upcoming Budget be fiscally expansionary, as some economists are calling for, or lean towards bringing the deficit under control?

There is a compelling case for measured flexibility in targeting the fiscal deficit number for FY23. Agreed, there is the compulsion to move back to the fiscal prudence path and achieve the 4.5% ratio by FY26. But some judgement needs to be borne here. The economy is still not back on track and, while growth has recovered to an extent in FY22, FY23 will be the year for consolidation. There is a degree of assurance that any more Covid waves, if any, will pose lesser economic disruption. The vaccination programme has provided this confidence.

There is a view out there that higher government spending, especially on investment, is absolutely critical as the private sector is still not in a position to drive the economy and is unlikely to shed caution for another year. The surplus capacity creates little incentive for the private sector to enhance infra spending unless demand picks up considerably. And so, the onus falls on the government to kickstart languishing investments. The trouble with this set of arguments is not the primacy of fiscal consolidation. Keeping a close watch on the fiscal deficit is of course absolutely essential. But the main reason why over-relying on higher government capex may not fire up growth is that the capex of the centre is not large enough—it was at FY22 at 5.54 lakh crore—to drive an economy of the size of 232 lakh crore. Even if states pitch in, public investments cannot make too large a difference. The combined capex of the states tends to be larger than that of the Centre. It was to be 6.67 lakh crore for FY22. The states’ challenge is that they are bogged down by fiscal deficit target compulsions which constrains their ability to borrow more. Any move to rein in the states’ deficits falls on their capex, as it is discretionary. In the past, as we have seen, this has been done to ensure that the limits are not breached.

What is the way out then? In face of tremendous pressure for expansionary fiscal policies, the central government has so far shown restraint, while providing funds from the budget for critical spending: the vaccination programme and basic relief measures of small cash transfers and food grains for the poor and vulnerable. It must stay on this path of careful, calibrated balancing of consolidation against its fiscal responses to the pandemic and growth shocks. The FRBM targets should not be lost sight of completely.

That said, the government should work in two ways to keep the economy ticking to the extent it is possible. On the expenditure side, the budget must earmark a certain amount for capex, which can be an additional 0.5% of nominal GDP. This should be maintained for the next three years until the time private investment is back on track. Besides multiplier effects on growth, focusing this capex on railways, roads and urban development will also help bring about development. In fact, collaborating with states and giving them a similar flexible path will help.

The other is some benefits to households who have been buffeted twice over by high inflation. Giving relief on income tax will not serve to boost consumption, as it is likely to lead to increased savings by the relatively better-off. The key will be to boost consumption such that demand for industries bearing the brunt of the pandemic picks up. Considering indirect tax cuts such as excise and customs may just work. The GST Council can look at some downward revisions. But that will be outside the Budget.

These modest measures will support the recovery. Though they would entail a slightly higher deficit, they would be effective from the point of view of the budget contributing to the growth process.

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