We will have to grow our way into fiscal sustainability and that is why policies aimed at nurturing growth matter so keenly
The Union budget is first and foremost an annual financial statement. The primary concern is what it signals about the sustainability of the public finances of the country. The budget estimate (BE) of outstanding debt of the Centre and states together at end-March 2022, after consolidation adjustments and using the January advance estimate of gross domestic product, stood at 88.25 % of GDP. The special borrowing by the Centre of 1.1 trillion on-lent to states in lieu of GST compensation during 2020-21 is included in that.
The revised fiscal deficit (FD) of the Centre for the current year (2021-22) exceeds the budgeted figure of ₹15 trillion by ₹0.8 trillion. That is 0.4 % of GDP more than the budgeted level, not the seeming increase of 0.1 % from the reported percentages, because those use different denominators for the budget and revised estimates. That ramps up the concluding debt of the current year to 88.65 % of GDP. With the last budget’s commendable on-boarding of previously off-budget borrowings, only the valuation of external debt, beyond that anticipated by the Reserve Bank of India (RBI), could nudge the year-end public debt further up. The revised fiscal deficits at the state level are not known at this point, but they are usually lower than budget estimates. My expectation is that 89% of GDP would be the outer limit for public debt at the end of 2021-22.
The budget conservatively projects GDP for 2022-23 at ₹258 trillion, a nominal growth rate of a mere 11.1 %. Received debt scales down to 80.1 % of GDP. That yields a margin of 8.9 % for the consolidated fiscal deficit of the Centre and states if debt is to be held at the received level, of which the Centre has occupied a little over 6.4 %. States have been allowed to borrow 3.5 % of state domestic product, plus an additional 0.5 % conditional on power sector reforms. The power-sector conditionalities are onerous, so states are most likely to remain at 3.5 %. That means the consolidated debt at the conclusion of 2022-23, will hover at around 90 % of GDP, disregarding what might happen to the valuation of external debt. A commendable achievement at a difficult time.
The Centre’s market borrowings in 2021-22 of ₹8.8 trillion by the revised estimate actually fell below the budgeted ₹9.7 trillion. The increase in the fiscal deficit was covered by small savings and other inflows. Next year market borrowings are budgeted quite a bit higher, at ₹11.6 trillion. In addition, central securities due for redemption in 2022-23 amount to a whopping ₹3.8 trillion. However, a pre-term replacement announced by RBI on 31 January shifted redemption down the road to 2028-29, reducing the 2022-23 burden by ₹0.63 trillion (basically shifting that to the current year). As things stand, redemption remains heavy beyond next year, rising steadily to ₹5.5 trillion in 2025-26, further testing the appetite of the market for government securities. You can see why the fiscal consolidation time-table calls for bringing down the FD down to 4.5% of GDP that year.
In the end, we need to grow our way into fiscal sustainability, and that is why policies to nurture growth matter so keenly. The budget recognizes the centrality of that, and has provided for direct capital expenditure of ₹7.5 trillion for 2022-23, as against a budgeted provision for the current year of ₹5.5 trillion. The revised estimate for the current year, after subtracting the amount paid to Air India in lieu of liabilities, actually falls a little below the budgeted level. There are many process obstacles that stand in the way of a financial allocation actually finding expression in the real economy.
Grants in aid for creation of capital assets, budgeted for 2022-23 at ₹3.2 trillion, are added on to direct expenditure to yield a total “effective" capital expenditure of ₹10.7 trillion. However, these grants include the rural employment scheme, so the only real incrementality in that is the ₹1 trillion allotted as interest-free 50-year loans to states with bullet repayment. This scheme begun experimentally last year has found favour with states, and has been a good federal innovation which has gone largely unnoticed.
The sensational revenue performance has been widely commented on as the monthly data from the Controller General of Accounts came into view. By the revised estimates, the buoyancy of gross tax collections at the Centre was 1.4 in 2021-22, among the highest ever recorded. Surprisingly, the gross tax revenue budgeted for next year assumes a much lower buoyancy of 0.9, perhaps in advance acknowledgement of the fact that Central excise on fuel will have to be lowered if global oil prices rise much further.
GST collections are buoyant, and exhibit a stable relationship with data on e-way bills (another example of an initiative with whole-hearted support from states). That being the case, could we bring back the reverse charge mechanism (RCM), so that enterprises below the GST threshold can feel free to open shop again? Without that, how can we hope to relieve the pain of millions who have failed to make it into the upper arm of the K-shaped growth recovery?