Government Budgets

Fiscal management during a pandemic

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act

Mains level : Paper 3- Fiscal consolidation

Context

The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission. However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.

The budget focuses on capital investment

  • This year’s Union budget projects an increase in capex by Rs 3.14 lakh crore, as compared to the budgeted numbers of the previous fiscal.
  • Given the economy’s savings-investment profile and macroeconomic uncertainties due to the pandemic, private and household investments are likely to be reactive to the general economic environment.
  • Achieving sustainable recovery: For the government, making capital investment in such uncertain times assumes a much higher priority and is equally indispensable for achieving a strong and sustainable recovery from the pandemic.
  • Increasing share of government: As per National Accounts data, gross fixed capital formation by the general government (Centre and states) has shown an increase as a percentage of GDP from 3.48 in 2011-12 to 3.82 in 2019-20, while other sectors, particularly households, the share fell from 15.75 per cent to 11.39 per cent during the same period.
  • The fiscal stance taken in the post-pandemic budgets for higher capital spending, including the budget of 2022-23, is likely to further enhance the general government share in overall capital formation. 
  • Important role of the States: it is also important to recognise that two-thirds of the general government’s capital expenditure is undertaken by states and in this context, the announcement of the Rs 1 lakh crore interest-free loans to the states to increase public investment has been a significant step.
  •  Since states taken together have a higher share in the country’s public capital spending, effective absorption of this additional borrowing facility will be critical for higher public investment.

Three broad trends on Fiscal Consolidation

  • 1] Increase in taxes: The increase in taxes by Rs 5.71 lakh crore between 2020-21 (the first year of the pandemic) and 2022-23 shows that the fiscal challenges have eased, but remain present as we navigate economic recovery in uncertain times.
  • 2] Reduction in revenue deficit: Between 2020-21 and 2022-23 (BE), the reduction in revenue deficit has been substantial — from 7.3 per cent to 3.8 per cent of GDP.
  • 3] Revenue deficit dominates fiscal deficit: Compositionally, revenue deficit continues to be more than 55 per cent of the fiscal deficit and the management of such a deficit has few important considerations for revenue expenditure, that is, interest payments and allocation under various centrally sponsored and central sector schemes.
  • Role of CSS in revenue deficit: Aggregate allocation under centrally sponsored and central sector schemes (CSS) as per the 2022-23 (BE) is Rs 3.83 lakh crore and the interest payment cost of the Union government is Rs 9.56 lakh crore.
  • Beyond scheme-wise allocations, it is also important to consider CSS allocation as an issue of macro-fiscal management issue at the Union and state level, especially when it is contributing to the high revenue deficit of the central government and binding state resources for matching contribution, thereby increasing states’ deficit.

Understanding the direction of fiscal consolidation

  • The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission.
  • However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.
  • Though in the medium-term, the fiscal story is about supporting recovery, it is also true that there is no “one-size-fits-all” solution to fiscal consolidation and debt sustainability. 

Conclusion

The direction of fiscal consolidation rather than a specific quantified path in an unprecedented time like this is probably the most appropriate consideration.

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Manish Yadav
Manish Yadav
8 months ago

Civilsdaily team आपका यह प्रयास सराहनीय है दैनिक समसामयिकी को लेकर। चूंकि आपका ये सब कंटेंट इंग्लिश में होता है जो कि हिंदी माध्यम का छात्र होने के नाते हमें उसका हिंदी समझने में कठिनाइयां होती रहती है । चूंकि अंततः एक अच्छी जानकारी और उत्तर – लेखन के लिए मुझे हिंदी भाषा में ही सब तरह से बेहतर होना है और इसमें सहज भी हूं। अतः आपसे नम्र निवेदन है कि कृपा कर ये दैनिक समसामयिक को हिंदी में भी देने की एक नई पहल करें। मुझे आपकी हर कंटेंट काफी लाभदायक और रमणीय लगता है लेकिन अंततः मुझे ‘काश ये हिंदी में भी होता’ जैसी इंग्लिश में लिखी कंटेंट को पढ़ने के बावजूद निराशा में डूबना पड़ता है हर दिन। आशा कि एक पुल आपसे बांध रहा हूं , कृपा कर मेरे इस सुझाव को स्वीकार कर जल्द ही अपना प्रतिक्रिया दें।।।

धन्यवाद !!