Government Budgets

Don’t worry about the deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Debt to GDP ratio

Mains level : Paper 3- Need to shed the worry over fiscal deficit

The devastation caused by the second wave calls for the government to shed its worry over the fiscal deficit. The article deals with this issue.

Role of fiscal policy to support economy through second wave

  • As India battles to contain the surge in COVID-19 cases, several states have already imposed severe restrictions at the local level.
  • The services sector has been hit the most as a consequence of these lockdowns and it would be difficult for India to deliver on this optimistic growth projection.
  • Against this background, the role fiscal policy can play to support the economy needs consideration.
  • The monetary policy is already accommodative and may not have enough room to further boost the economy.
  • With headline as well as core inflation inching up in recent months, the RBI may not be in a position to further cut the policy rate.
  •  As per the latest Union Budget, the fiscal deficit is estimated to moderate from 9.5 per cent of GDP in FY21 to 6.8 per cent of GDP in FY22.
  • This expected decline in fiscal deficit is not on account of lower fiscal spending but because of expectations of sharper revenue growth.
  • The revenue receipts are estimated to grow by 15 per cent and fiscal spending by 1 per cent this financial year.
  • With the debt to GDP ratio already more than 90 per cent, additional fiscal expansion will not be an easy choice for the government.

Government need to create fiscal space

  • Extraordinary times call for extraordinary measures and the government will have to find ways to create fiscal space.
  • This has become especially important as the economy is yet to shrug off the impact of the previous lockdown.
  • Under these difficult circumstances, immediate measures must aim at providing the requisite social safety net to the poor and the vulnerable.
  • The central government has already announced it will distribute an additional five kg of grain to the 800 million beneficiaries of the National Food Security Act, which is welcome.
  • However, given the unprecedented uncertainty brought about by this COVID wave, the ration support under the PDS should be raised further.
  • The government should also consider transferring cash to the bank accounts of the poor, just as it did last time.
  • This becomes important as MGNREGA  may not provide the safety cushion that it is indeed to as long as lockdown measures remain in place.
  • The best stimulus perhaps would be to provide free vaccinations to the population as the benefits of faster and wider vaccine coverage more than outweighs its monetary cost.
  •  Immunisation is a public good. As we get over this crisis, the government must increase its outlay on physical and human health infrastructure.

How to finance additional cost?

  •  Part of this additional cost may be financed by reducing non-essential government expenditures and use it for COVID-related expenditure.
  • The government may need to resort to additional borrowings from the market than budgeted earlier.
  • The RBI may allow inflation above the upper bound of 6 per cent only in the short run.
  • The plausible rise in interest rates may also be crucial to prevent capital outflows, given the global “economic outlook” when the US economy adopts an easy monetary policy combined with a huge fiscal stimulus.

Conclusion

The government should not be deterred by a worsening fiscal deficit in the short run as the additional growth that it generates may make debt consolidation easier when things normalise.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments