Union Budget 2021: After pandemic disruption, time to focus on demand side of economy

Whichever way one may look at, the priority of FY 2022 Union Budget has to be and would be on getting the economy back on track. However, it is easier said than done, given the challenges and disruptions caused by the COVID-19 pandemic. The FY 2021 Budget was presented well before the COVID-19 related disruption occurred. However, even at that time government finances were constrained and the government used the escape clause available under the Fiscal Responsibility and Budget Management (FRBM) Act to let the fiscal deficit of FY 2020 slip by 50 bp to 3.8 percent of GDP and budgeted the fiscal deficit for FY 2021 at 3.5 percent of GDP. The budgeted deficit of 3.5 percent for FY 2021 was based on nominal GDP growth of 10.0 percent. Given that the nominal GDP growth for FY 2020 had already fallen to 7.2 percent due to slowing consumer demand, achieving 10 percent nominal GDP growth and gross tax revenue buoyancy of 1.2x in FY 2021 was a stretch target. As the fiscal year progressed and the economy got battered by the COVID-19 pandemic and the lockdown, it became obvious that the government is staring at a double whammy–lower revenue receipt and higher public expenditure on health in FY 2021. Furthermore, to support the battered economy, the Union government announced an economic package aggregating Rs 29.87 trillion (government Rs 17.16 trillion, and RBI Rs 12.71 trillion) though the actual fiscal impact was about Rs 3.5 trillion (1.8 percent of GDP) only. An analysis of the economic packages suggests that much of the government support has been in the form of credit guarantees and/or credit lines and was focused on the supply side. There is nothing wrong in addressing the supply- side issues, as it indeed was needed to restore/augment the broken supply chain, especially in an economy where micro, small and medium enterprises play an important role in generating output and employment. However, by minimising the direct fiscal impact on its finances, the government chose to be fiscally conservative in FY 2021, perhaps due to the fiscal constraint. The economy has lately shown some green shoots and several high-frequency indicators are reaching the pre-COVID level of production, bolstered by a combination of festive/pent-up demand. However, after two consecutive months of positive growth, a contraction in factory output (Index of Industrial Production) in November 2020 shows the fragility of the ongoing recovery. An appropriate demand-side measure, therefore, is as important as supply-side measures. The near absence of this in the economic package announced so far may jeopardise the recovery and may even lead to a second-round impact. Even if the supply side gets restored on account of the various measures announced by the government/RBI, it may soon run into difficulty due to the lack of adequate demand for goods and services. Thus, it is high time for the government to change gear and focus on demand, lest the ongoing recovery begins to lose steam. Against this backdrop, the fiscal arithmetic of Union Budget FY 2022 is expected to revolve around a nominal GDP growth of 14.0 percent and fiscal deficit of 6.2 percent of GDP with a focus on boosting aggregate demand, expenditure reprioritisation and mobilising higher non-tax revenue. Some of the specifics on which the government is expected to focus on the forthcoming budget are: Spending on infrastructure especially that are employment-intensive and have a shorter turnaround time and MGNREGS; creation of a new development financial institutions to bring inpatient capital, the continuation of relief/income support to the poor households, more support to real estate given its backwards-forward linkage in the economy, support to micro small and medium enterprises, reprioritisation of revenue/capital expenditure towards essentials coupled with rationalisation/discontinuation of schemes/sub-schemes that have meagre resource allocation and are non-impactful and mobilisation of higher non-tax revenue via disinvestment to fund expenditure. With equity markets at an all-time high, this perhaps is the most opportune time to sell stakes in public entities. Although tax revenue is also expected to increase in FY 2022 on the back of an economic recovery, the real impetus to revenue receipts of the government can only come from the non-tax revenue. The writer is Principal Economist and Pant, Chief Economist with India Ratings Research.