Government Budgets

Government Budgets

Resource crunch in states after Covid second wave


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Impact of second Covid wave on States' fiscal health

The article gives the overview of the impact of second Covid wave on the fiscal health of the States.

Impact of first Covid wave on fiscal health of states

  • The analysis of the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim reveal a grim picture.
  • The aggregate revenue deficit for 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion.
  • And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.

How states had projected ambitious decline in revenue deficit

  • The budgets for the ongoing fiscal year,  had projected an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20.
  • This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
  • This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending pegged at 34.1 per cent.
  • This anticipated shrinking also allowed the States to attempt a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).

Fiscal concerns over second Covid wave

  • The second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns.
  •  The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year.
  • Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
  • The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April.
  • This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months.
  • Nevertheless, the GST collections is likely to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April,
  • That reflected healthy economic activity in March.

The shortfall and way forward

  •  States’ own tax collections is estimated to trail their budget estimates as they were drawn up before the second wave.
  • For this year,  state GST collections would be at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion.
  • This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections.
  • Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states.
  • If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months.
  • Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.


In any case, the capital spending budgeted by certain state governments this year appears to be optimistic. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity.

Government Budgets

challenges the second Covid wave poses to India’s path to fiscal consolidation.


From UPSC perspective, the following things are important :

Prelims level : Tax buoyancy

Mains level : Paper 3- Recalibration of growth projections

The article highlights the challenges the second Covid wave poses to India’s path to fiscal consolidation.

Recalibration to growth projection due to second Covid wave

  • The growth projections of different national and international agencies and the fiscal projections of Centre’s 2021-22 Budget require recalibration.
  • The International Monetary Fund (IMF) had forecast real GDP growth for 2021-22 at 12.5%.
  • The Reserve Bank of India (RBI) had forecast real GDP growth for 2021-22 at 10.5%.
  • The Ministry of Finance’s Economic Survey had forecast real GDP growth for 2021-22 at 11.0%.

Growth rate of 8.7% to keep GDP at same level as in 2019-20

  • Moody’s has recently projected India’s GDP growth in 2021-22 at 9.3%.
  • Benchmark growth rate: 9.3% is close to the benchmark growth rate of 8.7% which would keep India’s GDP at 2011-12 prices at the same level as in 2019-20.
  • This level of growth may be achieved based on the assumption that the economy normalises in the second half of the fiscal year.
  • The 2019-20 real GDP was ₹145.7-lakh crore at 2011-12 prices.
  • It fell to ₹134.1-lakh crore in 2020-21, implying a contraction of minus 8.0%.
  •  At 8.7% real growth, the nominal GDP growth would be close to 13.5%, assuming an inflation rate of 4.5%.
  • This would be lower than the nominal growth of 14.4% assumed in the Union Budget.
  • At 13.5% growth, the estimated GDP for 2021-22 is ₹222.4-lakh crore at current prices.
  • Impact: This will lead to a lowering of tax and non-tax revenues and an increase in the fiscal deficit as compared to the budgeted magnitudes.

How much the gross tax revenue would be impacted?

  • The budgeted gross and net tax revenues for 2021-22 were ₹22.2-lakh crore and ₹15.4-lakh crore, respectively.
  • The assumed buoyancy for the Centre’s gross tax revenues (GTR) was 1.2.
  • If, however, the buoyancy of 1.2 proves optimistic and instead a buoyancy of 0.9, which is the average buoyancy of the five years preceding the COVID-19 year, is applied, the nominal growth of GTR would be 12.2%.
  • This would lead to the Centre’s GTR of about ₹21.3-lakh crore.
  • The corresponding shortfall in the Centre’s net tax revenues is estimated to be about ₹0.6 lakh crore.
  • The budgeted magnitudes for non-tax revenues and non-debt capital receipts at ₹2.4-lakh crore and ₹1.9-lakh crore, respectively, may also prove to be optimistic.
  • In these cases, the budgeted growth rates were 15.4% and 304.3%, respectively.
  •  The excessively high growth for the non-debt capital receipts was premised on implementing an ambitious asset monetisation and disinvestment programme.
  • Together with the tax revenue shortfall of nearly 0.6 lakh crore, the total shortfall on the receipts side may be about ₹2.1-lakh crore.

Impact on fiscal deficit estimates

  • Two factors will affect the fiscal deficit estimate of 6.76% of GDP in 2021-22.
  • First, there would be a change in the budgeted nominal GDP growth.
  • Second, there would be a shortfall in the receipts from tax, non-tax and non-debt sources.
  • Together, these two factors may lead to a slippage in fiscal deficit which may be close to 7.7% of GDP in 2021-22 if total expenditures are kept at the budgeted levels.
  • This would call for revising the fiscal road map again.
  • Protecting total expenditures at the budgeted level is, however, important given the need to support the economy in these challenging time.

Vaccination policy and role of Central government

  • Positive externalities: COVID-19 vaccination is characterised by strong inter-State positive externalities, making it primarily the responsibility of the central government.
  • The entire vaccination bill should be borne by the central government.
  • If the central government is the single agency for vaccine procurement, the economies of scale and the Centre’s bargaining power would keep the average vaccine price low.
  • The central government may transfer the vaccines rather than the money that it has budgeted for transfer.
  • Some of the smaller States may find procuring vaccines through a global tender to be quite challenging.


Protecting total expenditures at the budgeted level and mass vaccination are important in India’s pandemic situation.

Back2basics: Tax buoyancy

  • There is a strong connection between the government’s tax revenue earnings and economic growth.
  • Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP.
  • It refers to the responsiveness of tax revenue growth to changes in GDP.
  • When a tax is buoyant, its revenue increases without increasing the tax rate.
  •  In 2007-08, everything was fine for the economy, GDP growth rate was nearly 9 per cent.
  • Tax revenue of the government, especially, that of direct taxes registered a growth rate of 45 per cent in 2007-08.
  • We can say that the tax buoyancy was five (45/9).

What is tax elasticity?

  • It refers to changes in tax revenue in response to changes in tax rate.
  • For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity.

Government Budgets

Don’t worry about the deficit


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.


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.

Government Budgets

A post-Covid fiscal framework for India


From UPSC perspective, the following things are important :

Prelims level : Provisions of the FRBM Act

Mains level : Paper 3- Issues with the FRBM and alternative framework

The article highlights the failure of FRBM Act to contain India’s rising debt and suggests an alternative framework.

Issues with the FRBM Act

  • Economic disruption caused by the COVID has prompted calls for a relook atthe Fiscal Responsibility and Budget Management Act (FRBM).
  • The introduction of the FRBM in 2003 reflected the belief that setting strict limits on fiscal deficits, both for the centre and the states, was the solution.
  • But this framework didn’t work.
  • Apart from the initial period, when growth was booming, the deficit targets were largely honoured in the breach, leaving the primary balance [Revenue-Non-intrest expenditure] essentially unchanged (Figure 2, phase 2).

Debt has increased to record levels

  • India’s general government debt has soared.
  • It is now close to 90 per cent of GDP — the highest independent India has ever seen.
  • The debt ratio will come down naturally as GDP normalises.
  • Even so, on current policies, it is likely to exceed 80 per cent for the foreseeable future.

Would such a high level of debt be sustainable?

  • Briefly, sustainability depends on two key factors:
  • 1) The primary balance (PB), revenue less non-interest expenditures.
  • 2) The difference between the cost of borrowing and the nominal growth rate (r-g).[interest-growth differential]
  • Debt does not explode when the primary balance is greater than the interest-growth differential.
  • In India’s case, PB has been negative as the government has run primary deficits.
  • But this has been counterbalanced over the past decade by favourable differentials, as interest rates have been lower than growth.
  • Hence, the broadly stable debt ratio.
  • This equilibrium has now been upset by the sudden increase in debt.
  • If the interest-growth differential consequently turns unfavourable, as occurred during the previous period of high debt in the early 2000s (Figure 2, phase 1), then debt sustainability could only be preserved by shifting the primary balance into surplus.
  • And this would not be easy.

Why shifting primary balance intro surplus is not easy

  • Primary deficit of the Centre and states combined is typically about 3 per cent of GDP. [say PB is -3% of GDP]
  • So, shifting the primary balance into a modest surplus [i.e. turning PB from -ve to +ve] would require an adjustment of 4 percentage points of GDP.
  • But non-interest expenditure is only roughly 20 per cent of GDP.
  • If tax increases were ruled out, then a sudden adjustment would require non-interest spending to be cut by no less than 20 per cent (4 divided by 20 times 100).[20% of 20 is 4]
  • Clearly, this would be politically impossible.
  • But this would render India susceptible to panic and possibly even crises.
  • The government needs to eliminate the tension, undertaking a pre-emptive consolidation to prevent the need for a sudden adjustment.

Strategy based on 4 principles

  • The government should start by defining a clear objective, based not on arbitrary targets but on sound first principles: It should aim to ensure debt sustainability.
  • To this end, the government could adopt a strategy based on four principles.

1) Abandon multiple fiscal criteria

  • The current FRBM sets targets for the overall deficit, the revenue deficit and debt.
  • Such multiple criteria impede the objective of ensuring sustainability since the targets can conflict with each other,
  • This creates confusion about which one to follow and thereby obfuscating accountability.

2) Don’t get fixated on specific number

  • Around the world, countries are realising that deficit targets of 3 per cent of GDP and debt targets of 60 per cent of GDP lack proper economic grounding.
  • In India’s case, they take no account of the country’s own fiscal arithmetic or its strong political will to repay its debt.
  • Any specific target, no matter how well-grounded, encouraging governments to transfer spending off-budget such as with the “oil bonds” in the mid-2000s and subsidies more recently.

3) Focus on one measure for guiding fiscal policy

  • In this regard, Arvind Subramanian and Josh Felmanwe propose targeting the primary balance.
  • This concept is new to India and will take time for the public to absorb and accept.
  • But it is inherently simple and has the eminent virtue that it is closely linked to meeting the overall objective of ensuring debt sustainability.

4) Don’t set yearly target for the primary balance

  • The Centre should not set out yearly targets for the primary balance.
  • Instead, it should announce a plan to improve the primary balance gradually, by say half a percentage point of GDP per year on average.
  • Doing so will make it clear that it will accelerate consolidation when times are good, moderate it when times are less buoyant, and end it when a small surplus has been achieved.
  • This strategy is simple and easy to communicate; it is gradual and hence feasible.

Consider the question “Despite the FRBM framework India’s debt level have touched a historic high. In light of this, examine the reasons for the failure of FRBM in controlling the debt level and suggest the way forward to make India’s debt level sustainable.”


COVID has upended India’s public finances. It is time to learn from past experience and adapt. Adopting a simple new fiscal framework based on the primary balance could be the way forward.

Government Budgets

An effective plan to monetise government assets


From UPSC perspective, the following things are important :

Prelims level : Asset Monetisation Pipeline

Mains level : Paper 3- Asset monetisation

The article discusses the government’s proposal to monetise assets and proposes the idea of an independent commission to carry out the task of monetisation.

Roadmap for monetisation of asset: National Monetisation Pipeline

  • Finance Minister had introduced a roadmap for monetisation of asset in the Union Budget.
  • In the budget, the government proposed to launch a ‘National Monetisation Pipeline’ to assess the potential value of underutilised and unused government assets.
  • A number of countries including the United States, Australia, Canada, France and China have effectively utilised this policy.
  • In India too, the concept was suggested by a committee led by Vijay Kelkar on the roadmap for fiscal consolidation in 2012.
  •  The committee had suggested that the government start monetisation as a key instrument to raise resources for development.
  •  It asked the government to use these resources for financing infrastructure needs.

Why monetisation

  • The global pandemic forced the government to increase spending.
  • Thus, total expenditure of the government has jumped to 34.50 trillion against the target of 30.42 trillion.
  • On the flip side, revenue of the government is shrinking.
  • As a result, total borrowing has increased by 2.3 times, from 7.96 trillion to 18.49 trillion.
  • An increase in borrowing also increases interest cost.
  • The ratio of interest payment to revenue receipts was 36.3% in 2019-20.
  • As per revised data, it has increased to 44.5% in the current fiscal year and is projected at an all-time high of 45.3% in 2021-22.
  • Almost half of the revenue is going towards servicing old debts. To revive the economy, capital expenditure is indispensable.

National Infrastructure Pipeline

  • In this backdrop, the government has already launched the National Infrastructure Pipeline (NIP), with 6,835 projects in December 2019.
  • The project pipeline has been increased to 7,400.
  • The NIP has its own specific target and the government is committed to achieve it in the coming years.
  • It called for a major increase in funding.
  • For 2021-22, the government has proposed to spend 5.54 trillion, which is 34.5% higher than the budgeted amount of 2020-21.
  • Now, the government found that monetisation of government- and public sector-owned assets would be an important financing option for new infrastructure construction.

Model for monetisation of asset: REITs

  • The government is looking at the Real Estate Investment Trusts (REITs) model for monetisation of assets.
  • Under REITs, the land assets are transferred to a trust providing investment opportunity for institutional investors.
  • The government has another option to lease or rent out the assets instead of going for monetisation.
  • The government expects monetisation will generate 2.5 trillion in non-debt capital revenue.
  • The objective of asset monetisation is to raise resources for future investment into the sector.
  • A pipeline monetisation plan for Indian Oil, GAIL, and Hindustan Petroleum has been drawn up by the government.
  • It is expected that the government will raise 0.17 trillion by selling stakes in these three companies.

Consider the question “What is asset monetisation? What strategy should be followed by the government in the monetisation of assets?


To handle effectively the task of monetisation of assets, the government should constitute an independent commission clothed with requisite powers and staffed by professionals and researchers to formulate and implement its monetisation initiative.

Government Budgets

State budgets belies the hopes of public-spending-led recovery


From UPSC perspective, the following things are important :

Prelims level : Fiscal deficits

Mains level : Paper 3- State budgets belies the hopes of public spending led recovery

The article highlights the trends emerging from the State budgets which dashes the hopes of public-spending led economic recovery.

State-level budget trends

  • Over the past few weeks, several state governments have presented their budgets for the financial year 2021-22.
  • The states, put together, account for a larger share of general government spending than the Centre.
  • States’ spending stance is pivotal to the hopes of a government spending-led economic recovery.

5 Broad trends from the state budgets

  • The broad state-level budget trends are based on 11 states that account for a little over 60 per cent of India’s GDP.

1) Offsetting the additional spending by Centre

  • There is a collapse in states’ revenues and transfers from the Centre.
  • Along with it, there is a “reluctance” among some states to borrow more to spend.
  • Thus, the aggregate level spending by these states in 2020-21 will end up being lower than what they had budgeted for before the onset of the pandemic.
  • The revised estimates peg their total expenditure to decline by around 6 per cent in 2020-21 from their budget estimates.
  • If these trends were to hold for the other states as well, then it would imply that the additional spending by the central government, over and above its budget estimate is likely to be offset by the decline in spending by states.

2) From revenue surplus to revenue deficit

  • This year, states which typically run revenue surpluses will run revenue deficits.
  • The collapse in revenues meant that states that usually borrow to finance capital expenditure have had to borrow to finance their recurring expenditure (revenue expenditure) as well.
  • As a consequence, capital spending by states has been cut sharply.
  • States, though, expect the situation to reverse in the coming fiscal year, with most projecting a return to revenue surpluses even as the Centre will continue to run revenue deficits.
  • This anomaly is unlikely to be resolved unless the root cause of the situation — the nature of the fiscal compact between the Centre and the states — is addressed.

3) Reluctance by states to borrow

  • The Centre had raised the ceiling on their market borrowings from 3 to 5 per cent of GSDP.
  • Of this 2 percentage point increase in the borrowing limit, part was unconditional while the remaining was subject to fulfilling Centre-mandated reforms.
  • As per ICRA’s estimate, 17 states qualified based on the One Nation One Ration Card reforms, 15 qualified based on the ease of doing business reforms, seven partially completed power sector reforms, while six had completed the urban local body reforms.
  • But, it is only the low-income states of Bihar, Rajasthan and Madhya Pradesh with already stretched finances that seem to have availed the additional borrowing space.
  • The high-income states of Gujarat, Maharashtra and Karnataka, all of whom had greater fiscal headroom going to the crisis, and were better placed to borrow more and spend, have not done so.

4) Aggressive fiscal consolidation

  • As is the case with the Centre, states have, remarkably, budgeted for aggressive fiscal consolidation next year.
  • The average fiscal deficit across these states is expected to fall by more than 1 percentage point of GSDP, more than twice the decline recommended by the 15th finance commission.

5) Ambitious revenue assumptions

  • The aggressive consolidation next year is expected to be achieved not by expenditure compression, as is the case with the Centre, but by significant revenue enhancement.
  • However, some revenue assumptions are quite ambitious, to say the least — some states have pegged their GST and VAT collections to grow far in excess of 30 per cent in 2021-22.
  • A deterioration in fiscal marksmanship will mean that expenditure in the coming fiscal year will also end up being lower than what has been budgeted for.

Consider the question “The pandemic has upended the States’ fiscal space, which is evident in their budgets. In light of this, examine the trends emerging from the budgets of the States and their implications for the economy.”


Subdued general government spending during these tumultuous years heightens the risks to economic recovery. Considering the possibility of the economy exiting from this period with lower medium-term growth prospects, there is a strong case for greater government spending during these years.

Government Budgets

A changing fiscal framework


From UPSC perspective, the following things are important :

Prelims level : Primary surplus

Mains level : Paper 3- Change in government's fiscal policy stance

The article examines the changes in government’s fiscal policy stance which supports the debt-financing and apparent contradiction displayed by increased excise duty.

Increase in excise duty

  • Well before India began to globalise there was a time when each Union Budget announced sales tax increases on tobacco products.
  • The rise in tax was expected to be a shot in the arm for the revenue-starved government of our poor country.
  • India is less poor now, having risen to the rank of an emerging market economy.
  • Yet, COVID-19 has wreaked havoc.
  • As opposed to a Budget estimate of 3.5% for fiscal deficit, the revised estimates show a 2.7 times larger deficit of 9.5% for FY 2020-21. 
  • A comparison of the government’s revised Budget estimates with the original Budget estimates reveals a fall in receipts from every source of taxation except excise.
  • The revised Budget shows a rise of ₹94,000 crore on account of excise duties alone.
  • Presumably, the increase comes from the much-debated excise duty increases on petroleum and diesel.
  • The excise duty rise will hardly compensate for the huge falls in other tax revenues.
  • The larger excise duty collection is not large enough to have significantly reduced the inflated fiscal deficit figure.

Implications of hike in excise duty

  • Given the nature of the products on which the excise duty has gone up, prices of commodities will rise in general.
  • With annual output shrinking by an estimated 7.7%, it is straightforward to conclude that unemployment has risen significantly.
  • The accompanying price rise will be the unemployed persons’ worst nightmare.
  • The result will be severe inequality.

Change in economic policy framework

  • The Economic Survey 2020-21 considers Olivier Blanchard’s prescription that a fiscal deficit automatically transformed to government debt.
  • Such debts along with their servicing liabilities have a tendency to magnify over the years where present borrowings keep increasing to repay past borrowings and service charges.
  • This leaves little room for growth-enhancing expenditure and reduces a government’s creditworthiness in the eyes of lenders.
  • Debt-financed fiscal spending could well be a driver of growth.
  • It can improve the standard of living of the entire population, without necessarily removing inequality.
  • A government’s fiscal expenditure, Professor Blanchard points out, has stronger multiplier effects during recessions than during booms
  • The inequality, however, could well be benignant, for even though the rich will grow richer, the poor will escape out of poverty.

Condition for debt-financed fiscal spending

  • Debt or the fiscal deficit constitutes the government’s spendable resources.
  • What will prevent the government from sinking into a debt trap?
  • Professor Blanchard shows that the debt-to-GDP ratio can be prevented from exploding if the rate of growth of GDP happens to be higher than the sovereign rate of interest.
  • This is the case in developed economies.
  • In such economies, debt financed government expenditure will create a positive primary surplus out of which interest payments can be made to keep the debt-GDP ratio under control.
  • There will, of course, be a maximum value that this ratio can attain, a value that is higher the larger is the excess of the growth rate over the interest rate.

Contradiction in fiscal policy and fiscal regime

  • According to the Economic Survey, India’s average interest rate and growth rate over the last 25 years (leaving out FY 2020-21) have been 8.8% and 12.8% respectively.
  • Hence, Professor Blanchard’s condition is satisfied.
  • This, of course, is not to support excise duty increases, for it goes against the very principle of the Blanchard argument.
  • Therefore, there appears to be a contradiction between the government’s announced fiscal policy stance and the fiscal regime it is actually running.

Consider the question”The Economic Survey 2020-2021 calls for the debt-financed fiscal spending. Do you think that this view is suitable for India economy? What are the risks involved?”


The government must consider the implications of increased excise on the economy and should focus on removing the contradiction in its fiscal policy and fiscal regime.

Government Budgets

Tax regime change


From UPSC perspective, the following things are important :

Prelims level : Vivad se Vishwas scheme

Mains level : Paper 3- Measures adopted for increasing transparency and compliance in taxation.

Article explains the measures adopted in the Budget 2021-22 for increasing compliance and transparency.

Maintaining the status quo

  • COVID-19 has upset fiscal maths around the world.
  • It is in this context that the Union budget assumed significance this year.
  • The expectations of tax breaks were rife on the presumption that this could boost economic activity.
  • Whereas others called for a tax on stock market gains.
  • Unyielding to such requests, the budget was based on a pragmatic approach to maintain the status quo.

Why higher tax rates would not help much

  • Nearly 60 per cent of corporate taxes are paid by the 0.06 per cent of the companies belonging to the top income bracket.
  • On the other hand, among individual taxpayers, only 0.17 per cent report taxable incomes above Rs 25 lakh.
  • Therefore, higher taxes would either yield little revenue or adversely affect economic activity.

Need to shift focus to compliance and greater transparency

  •  For increasing compliance and transparency, significant proposals have been made:
  • 1) Limited the window for reopening the case to 3 years.
  • 2) The introduction of the requirement for an assessment officer to provide facts on the basis of which he/she re-assesses.
  •  3) The faceless Income Tax Appellate Tribunal (ITAT).
  • By making the process of assessment faceless the major causes for litigation are addressed.
  • The limited window of re-opening cases for small taxpayers and due consideration of risk management strategy and the CAG’s observations in carrying out such assessments marks an improvement in the process.

Dispute resolution mechanism with better interface

  • The Vivad se Vishwas scheme was launched in 2020 to address piling litigation and it is reported that collections under this scheme have been Rs 85,000 crore for 1,10,000 taxpayers.
  • This is a small fraction as compared to the Rs 4.34 lakh crore in corporate taxes and Rs 4.49 lakh crore in income taxes that are locked in dispute.
  • Therefore, a dispute resolution mechanism that allows for better interface between the taxpayer and the department may, in fact, be relatively beneficial.

Consider the question “Examine the reasons for small tax base in India. Examine the measures adopted in the Budget 2021-22 for increasing compliance and transparency.”


The budget estimates suggest that corporate tax and income tax collections are expected to increase by 22 per cent. With an expected growth rate of 14 per cent in nominal GDP, the remaining gains in taxes are presumably expected from higher compliance or realisation of taxes due. Whether this will pan out remains to be seen.


Government Budgets

Infrastructure push now, fiscal consolidation later


From UPSC perspective, the following things are important :

Prelims level : Types of fiscal deficits

Mains level : Paper 3- Push for the growth in the Budget, but concerns with the fiscal deficit remains

The Budget will aid the growth in the aftermath of the pandemic, however, concerns remain over the fiscal deficit.

Concerns about fiscal deficit

  • The Budget, taken as a whole, has provided reasonable stimulus to growth through a change in the composition of expenditure and other measures to improve the climate for investment.
  • But concerns remain about fiscal deficit.

High expenditure growth

  • Proposed growth in central expenditure, both in 2020-21 Revised Estimates (RE) and in 2021-22 Budget Estimates (BE), indicates the extent of contemplated fiscal stimulus.
  • For reaching the projected 2020-21 RE levels, the growth required in the last quarter of the current fiscal year over the corresponding period of the previous year appear extraordinary.
  • This involves transferring on to the Budget, the accumulated food subsidies amounting to ₹2,54,600 crore given to the Food Corporation of India through National Small Savings Fund (NSSF) loans.
  • The balance of subsidies amounting to ₹1,68,018 crore would be the food subsidy pertaining to 2020-21 (RE).
  • This is a desirable change towards transparency.
  • Taking revenue expenditure figures as budgeted and adjusting for the NSSF-accumulated food subsidy amount, the growth is 6.7% in revenue expenditure in 2021-22 (BE) over 2020-21(RE).
  • A good part of expenditure for the last quarter of 2020-21 may also pertain to clearing unpaid dues of various stakeholders including the private sector, autonomous bodies and government-aided institutions.
  • Clearing these payments is desirable and would add to demand.
  • The main expenditure push comes through a budgeted growth of 26.2% in capital expenditure in 2021-22.
  •  Relative to GDP, capital expenditure is expected to increase from 1.6% in 2019-20 to 2.3% in 2020-21 RE and 2.5% in 2021-22 BE, signalling a significant change in priority.

Increase in receipts

  • Significant increases are planned in non-tax revenues and non-debt capital receipts.
  • This increase is mainly predicated on higher dividends from non-departmental undertakings and spectrum sales.
  • From a contraction of 35.6% in 2020-21 (RE), non-tax revenues are budgeted to grow by 15.4% in 2021-22.
  • In the case of non-debt capital receipts, mainly covering disinvestment, a budgeted growth of 304.3% in 2021-22 stands in contrast with the contraction of 32.2% in 2020-21 (RE).
  • Disinvestment initiatives have so far yielded minimal results.
  • Budgeted increase in the Centre’s gross tax revenues is dependent on nominal GDP growth of 14.4%, with a buoyancy of 1.6 for direct taxes and 0.8 for indirect taxes. 

Steps towards asset monetisation

  • An important initiative pertains to the launching of a National Monetisation Pipeline.
  • The time lags involved in starting yielding revenue remain unpredictable because of various potential disputes and claims involving government-owned land.
  • A transparent auction process needs to be set up to facilitate suitable price discovery.

Other institutional initiatives

  • The Budget includes central government’s share to the National Infrastructure Pipeline.
  • However, success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role.
  • The Budget also proposes setting up of a Development Finance Institution (DFI), to serve as a catalyst for facilitating infrastructure investment.
  • The DFI would have an initial capital of ₹20,000 crore.
  • In order to manage non-performing assets of public sector banks, there is a proposal to set up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
  • Much depends upon the fine-tuning the operations of these institutions.

Finance Commission’s recommendations

  • In the action taken report, the Union government has accepted the recommended vertical share of 41% for the States in the shareable pool of central taxes.
  • The government has accepted the Fifteenth Finance Commission’s recommendation for revenue deficit grants, local body grants and disaster-related grants.
  • The scope of revenue deficit grants has been extended to cover 17 States in the initial years.
  • The determination of these grants is not based on equalisation principle although some norms have been used in the assessment exercise.
  • However, the government has put on hold the consideration of State-specific and sector-specific grants including performance-based incentives.
  • The substantive issue pertains to the mode of transfers in terms of general-purpose unconditional transfers against specific purpose and conditional transfers.
  • States had shown a preference for the former mode and it is for this reason that the 14th Finance Commission had raised the States’ share from 32% to 42%.
  • The reduction from 42% to 41% is only on account of the consideration of 28 States excluding Jammu and Kashmir because of its new status.
  • The imposition of cesses which are almost permanent has reduced the shareable pool.
  • In fact, the States’ share in the Centre’s gross tax revenues is only 30% in 2021-22 (BE).

Way forward

  • The Fifteenth Finance Commission has also proposed a revised fiscal consolidation road map for the Centre and States.
  • The Fifteenth Finance Commission has recommended the setting up of a High-Powered Intergovernmental Group to re-examine the fiscal responsibility legislations of the Centre and States.
  • Giving up the prudential norms will be a wrong lesson to learn from the crisis.
  • The issue of debt sustainability can be certainly re-examined by taking into account the evolving profiles of debt, interest payments, and primary deficits relative to GDP.


Fiscal deficit must be related to household savings in financial assets and the interest payments to revenue receipts. It should not be forgotten that in fiscal 2021-22, interest payments to total revenue receipts will be 45.3%, pre-empting a significant proportion of revenue receipts. We must be conscious of the burden of the rising stock of debt.

Government Budgets

Making Budget work


From UPSC perspective, the following things are important :

Prelims level : Types of fiscal deficits

Mains level : Paper 3- Paradigm shift in the budget and challenges in realising them

The article deals with the marked departures in this year’s Budget and the challenges in realising the changes.

Three paradigm shifts from past in this the Budget

1)Increased infrastructure spending

  • The main theme of the budget is a big thrust on infrastructure spending and public investment.
  • If the budgeted numbers are realised, capex would have grown from 1.6 per cent of GDP pre-COVID to 2.5 per cent in two years.
  • With India’s investment/GDP ratio falling by 5 percentage points over the last decade, a sustained public investment push — with its large multiplicative effects — is a much-needed impetus to reinvigorate growth and create jobs.

Implications of increased spending

  • The certainty sustained public investment is likely to crowdin private investment.
  • The certainty of investment-led employment that is likely to reduce household precautionary savings.
  • However, higher capex spend is being paid for by disinvestment and privatisation.
  • Effectively, non-core public-sector assets that don’t generate positive externalities — and, in fact, potentially distort the sectors they compete in — are expected to be replaced with much-needed physical and social infrastructure.
  • This newly created physical and social infrastructure emanate positive externalities and necessarily suffer from under-provisioning by the private sector.
  • If successfully executed — this will not be a case of selling the family silver to pay a credit card bill.
  • Instead, it will be akin to a productivity-enhancing asset swap on the public sector’s balance sheet.

2) Shift in the way for financing infrastructure

  • In stark contrast to the PPP model, infrastructure will now be financed off public sector balance sheets and, once operational and viable, will be monetised so as to recycle proceeds into the next project.
  • In theory, this is the appropriate division of public-private risk sharing.
  • It combines the public sector’s ability to better mitigate upstream risk while taking advantage of the glut of global liquidity potentially attracted to downstream projects.

3) Shift is towards more conservative and transparent fiscal accounting

  • There has been much focus on bringing the Food Corporation of India (FCI) liabilities back on the budget.
  • Less appreciated is the conservatism with which tax revenues have been budgeted for.
  • Revised estimates peg this year’s gross taxes at 9.9 per cent of GDP.
  • But for that to happen, taxes, net of excise, will need to contract by 20 per cent in the last quarter.
  • So it’s very likely gross taxes will end up 0.5 per cent of GDP higher this year.
  • Not only is this a welcome departure from the past when revenues were consistently over-budgeted, but it sets the base for next year.
  • With nominal GDP expected to grow in double digits, it’s likely taxes, net of excise, will experience a higher-than-unitary-elasticity to growth, especially given the increased formalisation that COVID has spawned.
  • Tax collections are, therefore, likely to exceed budgeted levels in 2021-22.
  • It behooves a very uncertain macroeconomic environment and creates some buffer if crude prices keep rising or other revenues don’t materialise.
  • Credible accounting over time will bring down risk premia in bond yields, and paradoxically generate a stimulative impulse.

Three challenges in realising these changes

1) Execution challenge

  • The budget’s impact on shaping the macroeconomic narrative will depend on the speed and efficacy of simultaneously building and selling public assets.
  • It will be important, for instance, to front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
  • With debt likely to rise to almost 90 per cent of GDP this year, it’s now incumbent on all stakeholders to consistently deliver the 10 per cent nominal GDP growth that’s needed to first stabilise debt at these levels and then bring it down.
  • Viewed from this lens, it is a budget where execution is vital.

2) Withdrawal of the policy support at appropriate time

  • While fiscal policy is being appropriately counter-cyclical at the moment, it must be equally nimble in the other direction.
  • When the recovery gets more entrenched, policy support should be withdrawn with equal speed and alacrity.

3) Role of monetary policy

  • With fiscal policy playing a primary role, monetary policy must slowly take a back seat.
  • The combination of a more relaxed fiscal path and domestic private sector savings normalising after the COVID surge could result in equilibrium bond market yields rising [fall in the price of bond] — but that is a cost worth incurring for a meaningful public investment push.
  • In the near term, the RBI may focus on ensuring this new equilibrium is reached in a non-disruptive manner.
  • Given the current slack in the economy, it’s understandable if fiscal and monetary are temporarily complementary.
  • But as confidence in the recovery grows, fiscal and monetary must quickly become substitutes — with the RBI progressively normalising liquidity to wardoff financial stability and fiscal dominance concerns — so as to safeguard macroeconomic stability.

Consider the question “This year’s Budget marked many departures from the past Budgets. However, there are several challenges in realising these departures. What are such departures and identify the challenges in realising them?”


The budget must be commended for embarking on important paradigm shifts. But its success, and in turn the sustainability of India’s recovery, will now come down squarely to policy execution and coordination.


Government Budgets

The Budget unshackles India’s economic growth story


From UPSC perspective, the following things are important :

Prelims level : Types of fiscal deficits

Mains level : Paper 3- Key feature of the Budget

The article highlights the three key feature of the Budget which makes it historic.

1) Disinvestment

  • Budget 2021-22 will begin the process of the withdrawal of the state from business.
  • Bank nationalisation in 1969 signalled a new era — just more than 50 years later, India has changed course for the better.
  • The budget signals that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.

2) Changed role of fiscal deficit in economic policy

  • Many of us forgot the original meaning of fiscal deficits and their importance.
  • When there is an unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
  • The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional budget.
  • The conventional argument was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits.
  • There was serious talk of a COVID cess, a wealth tax, and increase in the tax rate for the rich.
  • There is no increase in tax rates to increases tax revenue.
  • Rather, the finance minister took the extra-bold step of reducing corporate taxes in September 2019.
  • India awaits a comprehensive reform of the Direct Tax Code. It did not happen. But the stage is set for such a reform.

3) Transparency in fiscal math

  • If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures and as part of the deficit.
  • Also, the GDP growth estimates for 2021-22, forecasted at 14.5 per cent (nominal).
  • Normally, finance ministers in India tend to over-estimate, and most often, fall short.
  • Budget 2021-22 might be the first to significantly exceed the forecasts.

Criticism of the budget

  • One of the issues with the budget cited by the critics is that its forecasts would be in error because of problems of “execution and implementation”.


With many firsts, it is a budget that lays the foundation for sustainable recovery in GDP growth and welfare improvement.

Government Budgets

The reason that India cannot afford to go on a debt binge


From UPSC perspective, the following things are important :

Prelims level : Fiscal deficit

Mains level : Paper 2- Challenges posed by high debt levels

The article discusses the challenges associated with the Budget with a high fiscal deficit.

Change in government’s stance

  • India’s economy has suffered more than most from the covid pandemic and so have its people.
  • Its economic contraction has put pressure on its government, like so many others, to respond.
  • Until this week, government’s response had been relatively restrained.
  • The government implied that any welfare-promoting and growth-enhancing measures had to stand on a solid macro-economic foundation.
  • The federal budget for the next financial year, 2021-22, with the fiscal deficit for the current fiscal at 9.5% of gross domestic product (GDP) has changed that optimistic narrative.
  • The government has effectively abandoned its long-term commitment to bring the deficit down to close to 3% of GDP, pitching instead for a gentle descent to 4.5%—six years from now.

Implications of high fiscal deficit

  • Once the covid pandemic retreats, India might end up with a debt-to-GDP ratio of about 90%, compared to the low 70s at present.
  • It would be saddled with a permanently elevated fiscal deficit and a financial system bogged down by high levels of bad debt.
  • Consumer price inflation has topped the Reserve Bank of India’s target zone of 2%-6% since the covid lockdown began last year.
  • Unlike the US or China, countries in India’s position—which have neither a reserve currency nor strong growth momentum—cannot grow rapidly while exploding their debt.
  • They can’t afford to ignore rating agencies because of their supposed bias, or cock a snook at bond markets and just run the currency presses instead.
  • They need to grow in order to reduce their debt. That’s a very different dynamic.
  • India isn’t so attractive that it can expect vast sums of investment to arrive even if its macro-economic numbers look bad and its sovereign rating is junk.
  • We don’t have a history of deflation, we aren’t hitting the zero lower bound.
  • It’s quite the opposite; we have an economy prone to sustained high inflation.
  • India is not in a position in which it could build really productive assets using sustained deficit.
  • This is still a developing economy, which especially in bad times should tread carefully rather than throw caution to the winds.

Rationale behind high spending

  • The government is hoping that increased spending will help India grow out of this predicament.
  • The only way India can pull itself out of this jam is if private investment pours into the country, financing projects that push up the country’s potential growth rate.
  • Yet the government, already monopolizing domestic financial savings, seems to want to go to war with global markets as well.

Consider the question “Fiscal deficit figures for FY21 marks the end of India’s departure from the path of fiscal consolidation. Discuss the challenges posed by such high fiscal deficit to the Indian economy.


India’s greatest strength had been his commitment to fiscal responsibility. The path of fiscal adventurism could end up leaving India’s macroeconomy vulnerable.

Government Budgets

Government set for fiscal push, RBI needs to do more


From UPSC perspective, the following things are important :

Prelims level : Incremental Capital output ratio

Mains level : Paper 3- Highlights of the Budget 2021-22

The article analyses the key features of the Union Budget, including the increase in overall expenditure and jump in capital expenditure in FY22.

Explaining the Rs 4.1 lakh crore jump in expenditure in FY21

  • The budget has moved clearly from off-balance-sheet funding [borrowing by FCI and arrears of fertiliser subsidy] to headline-deficit funding.
  • That possibly explains the surge in fiscal deficit in the current fiscal at 9.5 per cent of GDP.
  • However, by excluding such off-balance-sheet funding, the headline-fiscal deficit declines to 8.6 per cent of GDP. 
  • A closer look at the food subsidy, juxtaposed with outstanding FCI liabilities shows that Rs 1.2 lakh crore (0.6 per cent of the GDP) is a pure accounting shift, while the rest Rs 1.9 lakh crore is new spending this fiscal.
  • Hence, the incremental spending in FY21 comes to around Rs 2.9 lakh crore (net of Rs 1.2 lakh crore/ 1.5 per cent of the GDP).
  • Interestingly, the government has also spent an additional Rs 62,638 crore on fertiliser subsidy, the entire amount of which has been front-loaded.

Focus on capital expenditure in FY22

  • Increase in the expenditure in FY22 is noticeable as the pie has decisively shifted towards capital expenditure.
  • The budgeted raise in FY22 is 4.6 times larger than the trend increase in the last two decades. 
  • The proposed capital expenditure amounts to 3.4 per cent of the GDP if we also include allocation for capital expenditure for autonomous bodies.
  • Assuming an Incremental Capital Output Ratio (ICOR) of 4.5, one can expect a GDP growth contribution of 0.8 per cent on account of the capital expenditure.
  • The other number in the budget that deserves admiration is the significant decline in extra budgetary resources of the government and PSUs. All this augurs well even for rating agencies if we go by purely fiscal transparency as a rule.

Steps to clean up NPAs in the banking sector

  • The most notable development in the financial system is announcement of setting up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
  • The approach is to set up an AMC, which in partnership with an ARC, takes over large stressed assets ( approximately Rs 3.5 lakh crore) spread across multiple banks that have a clear potential for turnaround.
  • An operational turnaround of the asset creates value for the overall system.
  • The AMC/AIF-led approach could enable a move towards true price discovery, consolidating debt into one single entity ensuring faster decision-making, freeing up blocked capital/funds and an operational turnaround of assets.
  • A better price discovery could be ensured by having an independent investment committee comprising of senior management professionals.

Increase in FDI limit in insurance sector

  • The Union budget also has a proposal to increase the FDI limit in insurance companies to 74 per cent from the present 49 per cent, with Indian management control.
  • It is expected that fresh capital will bring a new wave in technical know-how, innovation, and new products to the advantage of consumers, pushing up insurance penetration in the country.
  • However, we must ensure that foreign investors become interested in the Indian insurance sector as the current FDI used limit is at 33.8 per cent in private insurers.

Role of RBI

  • With the government set for a fiscal push, the baton has passed to the RBI.
  • Overall, monetary and fiscal policies need ideal co-ordination for macroeconomic management.
  • If the central bank pursues its monetary objectives by not accommodating debt financing in its strategy, the macroeconomic outcome may be worse for both the fiscal and monetary authorities, as well as for the economy.
  • Fortunately, the RBI and government have worked in perfect harmony during the pandemic.
  • As it continues, we can have a stable interest rate regime which will be rewarding for all, particularly the government.


The Union Budget for FY22 is a budget to consolidate (C), spend (S) and revive (R) and shows that the government is set for fiscal push. Now, the baton has passed to the RBI.

Back2Basics: What Is the Incremental Capital Output Ratio (ICOR)?

  • The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in the gross domestic product (GDP).
  • ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.

Government Budgets

Economy needs much more than what Budget 2021 offers


From UPSC perspective, the following things are important :

Prelims level : MSP

Mains level : Paper 3- Budget 2021-22 and missed opportunities

The article highlights the areas of economy for which the allocation in the Budget has either been kept unchanged or reduced, signaling the missed opportunity to revive the economy.

Including the off-budget items

  • An important feature of the Budget is the transparency on including the off-budget items.
  • The step will result in cleaning up of the balance-sheet of the Food Corporation of India (FCI).
  • The FCI was saddled with a debt of Rs 3.75 lakh crore by the end of December 2020, a significant part of which is now paid by the government.
  • So is the case of the fertiliser subsidy for which the pending Rs 65,000 crore was cleared.

What was the increase in expenditure due to pandemic

  • The total expenditure of the government in 2020-21 hardly increased compared to the pre-pandemic budget estimates (BE).
  • The total increase in revised estimates (RE) for 2020-21 is only Rs 33,000 crore, around 1 per cent more than what was budgeted.
  • The government did raise the expenditure on food subsidy, direct benefit transfer to Jan Dhan accounts (Rs 33,000 crore) and the increase in the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) (Rs 50,000 crore) and so on.
  • But it did so not by generating resources and expanding the fiscal deficit but by cutting down essential expenditure such as agriculture (Rs 18,000 crore), education (Rs 14,000 crore) and social welfare (Rs 14,000 crore).

No increase in health budget

  • The Budget announced increase in the health budget to Rs 2.23 lakh crore.
  • This number was achieved by adding one-time expenditures on the vaccine, Finance Commission grants and inclusion of expenditure on drinking water, sanitation and nutrition.
  • However, the budget of the health ministry for 2021-21 is lower at Rs 74,602 crore compared to the revised estimates of Rs 82,445 crore for the current year.

No increase in agriculture budget

  • Like in many other essential ministries, the agriculture ministry also witnessed a cut with estimates of 2021-22 lower by Rs 11,000 crore than last year.
  • Real investment in agriculture has been lower than 2013-14 for every year of this government.

Lack of attention on employment generation in rural area

  • The lifeline provided by expenditure in rural areas on infrastructure creation and employment generation has either seen a decline in budgeted expenditure or remained stagnant.
  • The budget for the ministry of rural development is lower by Rs 66,000 crore compared to the RE of last year.
  • The MGNREGA budget of Rs 73,000 crore is barely enough to cover the increase in wages by 11 per cent announced in March.
  • It is only 1.8 per cent higher than the actual expenditure of 2019-20, but 52 per cent lower than the RE of last year.
  • Similarly, for the Pradhan Mantri Gram Sadak Yojna (PMGSY), the budget for 2021-22 has been cut by Rs 4,500 crore, not even enough to cover inflation between the two years.

Consider the question “The Budget 2021-22 has been hailed for bringing in more transparency to the budgeting exerciese? Examine the context for this, how it will benefit the country?”


Estimates for next year point to missed opportunities to use fiscal measures to revive the ailing economy. Unlike the pandemic, where the arrival of vaccines has given hope, the ailing economy needs much more than this budget.

Government Budgets

The Budget bids goodbye to fiscal orthodoxy


From UPSC perspective, the following things are important :

Prelims level : Interest Rate-Growth Differential

Mains level : Paper 3- Departure from fiscal conservatism

A whopping fiscal deficit at 9.5% of GDP for FY21 highlights departure of India’s fiscal policy from the path of fiscal consolidation. The article highlights the issues related to such departure.

Important departure

  • With its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 Budget for 2021-22 seems to signal “spend like there is no tomorrow”.
  • For well over a decade-and-a-half, we have tried attaining deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
  • In this Budget, target of FRBM Act has not been adhered to.
  • The Budget thus marks an important departure from one of the key tenets of the Washington Consensus that was based on macroeconomic stability.
  • In previous years, Medium Term Fiscal Policy cum Fiscal Strategy Statement would give the indicators for the past two years as well as the projections for the next two years.
  • In this year’s Budget, the yearly projections are missing.
  • The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

The theoretical basis for departure

  • The Economic Survey laid the groundwork for a departure from rigid adherence to fiscal consolidation. 
  • It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate (IRGD), then the intertemporal budget constraint facing the government no longer binds.”
  • The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
  • The Survey argues that in India, the growth rate is higher than the interest rate most of the time. 
  • The Survey says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher.

Key concerns

  • An important factor for adhering to the fiscal constraint in the past was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP.
  • That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
  • Another concern is that a large fiscal deficit can fuel a rise in inflation.
  • A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
  • A large-scale privatisation almost always involves substantial FDI.
  • In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies.

Consider the question “The Budget 2021-22 is characterised by its departure from the path of fiscal consolidation. Examine the theoretical basis for such departure. What are the key concerns?”


If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.

Back2Basics: Interest Rate Growth Differential

    • A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate.
    • When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs.
    • In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.


Government Budgets

Despite some hits, the Budget has crucial misses


From UPSC perspective, the following things are important :

Prelims level : Development Finance Institution

Mains level : Paper 3- Crucial misses in the Budget 2021-22

The article highlights the key aspects of the budget and also mention the failure to address the challenge of employment and rising inequality.

Significance of the Budget

  • At its simplest, is the government’s tentative income and expenditure statement.
  • At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
  • It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.

Stepping up public investment and challenge of financing

  • The present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
  • The government will borrow an additional ₹80,000 crore for the purpose in the next two months.
  • Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
  • There is no mention of the government’s recourse to debt monetisation.
  • While the investment intentions are evident, its financing efforts seem to have too many loose ends.

Development Finance Institution

  • To deal with the poor industrial and infrastructure investment during the last decade the Budget proposed setting up of Development Finance Institution.
  • One of the reason for poor investment was a lack of long-term credit for infrastructure,which yields low rates of return spread over a long period of time.
  • Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
  • Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade.
  • Also,  most successful industrialising economies have relied on DFIs for providing long-term credit.

Financing challenge DFI could face

  • Weakness of DFI lies in securing stable long-term, low cost sources of finance.
  • The proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern.
  • By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees.
  • Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital.
  • Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.

Health infrastructure

  • A substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
  • A lessons from rural Swachh Bharat Abhiyan is that  complementary facilities need to be constructed in a coordinated manner to maximise the effectiveness of such investments.

No effort to address rising inequality

  • There is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
  • There is no mention of the stupendous rise in economic inequality during just the last year.
  • While the poor lost their jobs and livelihoods in 2020, corporate India’s profits increased.
  • The Budget could have consider a special tax on the super-rich — as many countries are now mooting.

Consider the question “What necessited the Development Finance Institution? Examine the challenge it would face in its functionig?”


In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.


Government Budgets

Budget is constructive, but lack of income support continues


From UPSC perspective, the following things are important :

Prelims level : Budget

Mains level : Paper 3- Lack of income support in the Budget

The article takes broad overview of the Budget and highlight the recovery led by the goverment spending.

Faster and sharper recovery

  • The economy has been recovering sharply and faster in the last two quarters than suggested by official growth numbers.
  • Official growth number remain based on antiquated year-on-year comparisons.
  • Comparisons from a year ago have a serious problem in that they depend on what happened four quarters earlier and tell us very little about growth momentum.
  • J.P. Morgan estimates suggest that, on a quarterly basis, India’s GDP plunged 25 per cent in the second quarter of 2020 and grew 21.5 per cent in the third quarter of the same fiscal year.
  •  This is a narrative markedly different from that portrayed by the official numbers.

What is the basis of optimis

  • The economy is likely to have grown another 10.5 per cent in the fourth and is expected to deliver a growth rate of negative 6.5 per cent for the full fiscal year and then rise by 13.5 per cent in FY 2022.
  • The basis of this optimism is two-fold.
  • First, by accident or design, India has managed to break the link between infection and mobility.
  • The second is the recent shift in the government’s fiscal stance.
  • After delaying for nearly six months, the government began to speed up spending in September.

Government spending to boost economy

  • With the economy recovering and the equity market surging, taxes and privatisation would reasonably be expected to rise.
  • The revenue increase could be used to reduce the deficit while keeping spending broadly at its current share of the Gross Domestic Product (GDP).
  • This would allow spending to grow 17-18 per cent, in line with the nominal GDP.
  • The choice really boiled down to where to spend.

Higher fiscal deficit

  • For this year, the Budget pegged the deficit at 9.5 per cent of GDP, much higher than market estimates of around 7 per cent and a 5 per cent-point rise over the previous year.
  • Instead of funding food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the case in the last few years, this year’s Budget has rightly brought some of that spending back on its accounts.
  • Excluding subsidies and interest payments, the increase in the deficit is just 2 percentage points of GDP.

Continues lack of income support

  • In the details, while there is a welcome emphasis on public health, infrastructure projects, and on privatisation, the glaring omission is the continued lack of income support.
  • This lack of income support is important.
  • Underlying the strong headline recovery in growth, imbalances in the economy have widened significantly.
  • The scarring in the labour market is extensive and the likely damage to household and SME balance sheets substantial.
  • While a debt moratorium and other regulatory forbearance have concealed the extent of the damage, these measures simply postpone the eventual reckoning.
  • A key risk is that not only is medium-term growth impaired because of the scarring, but also that banks turn risk-averse and do not extend credit exactly when the recovery is expected to gather strength once mobility fully normalises.

Consider the question “While the Budget for 2021-21 rightly health, infrastructure and privatisation, the lack of income support could threaten the prospects of recovery. Comment.”


While the Budget is constructive and has helped to allay fears of excessive fiscal tightening, it did not go far enough to mitigate the tail risk that the current economic recovery does not turn into a “dead cat bounce”.

Government Budgets

An overview of Economic Survey 2020-21


From UPSC perspective, the following things are important :

Prelims level : Terms used in Economic Survey

Mains level : Paper 3- Overview of the Economic Survey 2020-21

The pandemic has been leaving its imprint various aspects of our lives and Economic Survey is no different. This year’s Economic Survey focuses on the recovery path of the economy disrupted by the pandemic. The article takes an overview of the survey and also mentions the missing areas.

Focus on a recovery path

  • The Economic Survey analyses the broad trends at the macro level and the profiling of the initiatives across various economic activities.
  • This year, the Economic Survey focuses on the recovery path after initial derailment and the losses suffered by the Indian economy due to the pandemic.
  • The recovery is expected to follow a V-shaped path.
  • The Survey advocates countercyclical fiscal policies based on the premise that growth leads to debt sustainability.
  • The Survey brings together various relevant factors that have both a short and long-term impact on the economy and the budget.
  • This year’s Survey focuses on enhanced public healthcare spending and demonstrates how effective it has been in slashing out-of-pocket expenditures in the recent past.
  • It also shows the brilliant performance under the Pradhan Mantri Jan Arogya Yojana (PM-JAY) and the improved outcomes in states that have implemented the programme.
  • With focus on basic needs, the Survey has brought back national attention on the fundamental developmental paradigm.
  • The idea of analysing inequalities in times of recovery is a reassuring premise to move on with.

Comparison with past Economic Surveys

  • If we consider the last two Economic Surveys, the introduction of new concepts and approaches has been quite evident.
  •  In the Survey for 2018-19, the idea of “nudge” helped provide recognition of the importance of social behaviour change for any policy to succeed.
  • This led to the adoption of transformative approach in the Swachh Bharat Mission and Beti Bachao Beti Padhao initiative that integrated behavioural insights.
  • Another powerful idea has been using technology to run and monitor welfare schemes.
  • The Economic Survey 2019-20 talked overwhelmingly about the importance of wealth creation, entrepreneurship, and financial markets in the economic development.

What the Survey misses

  • The Survey should have focussed on a new narrative for trade.
  • Apart from explaining the missing value chains and integration with South and Southeast Asia, the survey should have analysed the high cost of tariffs when 38 per cent of our exports are import-dependent.

Consider the question “In the wake of economic disruption caused by the pandemic, India needs a new narrative for trade. However, India faces the challenge of missing value chains and lack of integration with South and Southeast Asia. In light of this, suggest the policies India should adopt as new narrative for trade.


Besides trade, FDI inflows and the accumulation of foreign exchange reserves has been remarkable this year. It is expected that India will emerge as an important link in the global value chain sector which has been visibly disrupted by the pandemic

Government Budgets

Need for expansionary fiscal stance in the Budget


From UPSC perspective, the following things are important :

Prelims level : Expenditure in Budget

Mains level : Paper 3- Issues with expenditure estimates in the Budget

The article highlights the issues with the system of Budget presentation and suggest the areas to focus on.

Issues with expenditure and revenue estimates

  • Experience shows revenues being much less than the Budget projections: each year, this mistake is repeated and even amplified.
  • The expenditure estimates are even more disingenuous because they understate the actual expenditures that should be counted.
  • This concern has been repeatedly brought up by the Comptroller and Auditor General of India (CAG).
  • A CAG report in 2018 identified at least three methods of reducing the stated expenditure:
  • 1) Not paying for the full fertilizer subsidy.
  • 2) Not paying the central government’s dues to the Food Corporation of India (FCI) for the food subsidy, and forcing the FCI to borrow from the market.
  • 3) Using other special purpose vehicles to pay for infrastructure investment, like the Long Term Irrigation Fund.
  • In 2017-18, just those three items amounted to ₹1,29,446 crore or 1.8% of GDP.
  • These strategies are problematic because they are non-transparent and they also force other agencies (like State governments and public sector enterprises) to go in for expensive commercial borrowing.

What CGA data reveals

  • The data from the Controller General of Accounts show that between April and November 2020, revenues of the central government predictably collapsed, by around 18%, or ₹181,372 crores, compared to the same period of the previous year.
  • But despite that, expenditures should have gone up, because the lockdown-induced collapse in an economic activity meant that public spending would be the only thing keeping the economy afloat.
  • In three rounds of stimulus packages government claimed to inject amounts of ₹1.7-lakh crore in March, ₹20-lakh crore in May, and then ₹2.65-lakh crore in November
  •  However, the public accounts show that the total spending of the central government increased by only ₹86,301 crores.
  • That was only a 4.6% increase — not even enough to keep pace with inflation.
  • In other words, the central government reduced its real spending over the period of the pandemic and economic crisis.
  • This fiscal stance obviously affects people and also adds to contractionary tendencies in the economy, and prolongs the severe demand recession.
  • Policies that destroy informal economic activities eventually come to harm the formal enterprises as well.

Consider the question “There has been growing concerns that expenditure estimates presented in our Budget fail to represent the actual expenditure of the government. What are the reasons for that and how it could affect the reliability of government finances?”


The Budget this year needs to focus on moving to a more expansionary fiscal stance that prioritizes employment generation and public service provision.

Government Budgets

Keep the wheels of economic recovery turning


From UPSC perspective, the following things are important :

Prelims level : New Monetary Framework

Mains level : Paper 3- Economic recovery and challenges ahead

Ahead of the Budget, the article discusses the status of Indian economy and suggests the measures to be adopted in the budget to speed up the recovery.

Estimates of damages and signs of economic recovery

  • The first advance estimates of national income published on January 7 project a contraction of 7.7% for real GDP.
  • The Q2 GDP estimates published by the National Statistical Office had suggested an economic recovery in India.
  • An improvement in the rate of contraction from 23.9% in Q1 to 7.5% in Q2 was seen as the beginning of a sustained recovery.
  • The Ministry of Finance, in its Monthly Economic Review highlighted it as signifying a ‘V’ shaped recovery and as a reflection of the resilience and robustness of the Indian economy.
  • The Monetary Policy Statement of the Reserve Bank of India (RBI) released on December 4, 2020 also projects positive growth in the remaining quarters of the financial year.

State of the economy before pandemic

  • Growth rate of the economy had collapsed from 8.2% in Q4 of 2017-18 to a mere 3.1% in Q4 of 2019-20, sliding continuously for eight quarters.
  • The policy stance against this backdrop was premised on the hope that private corporate investment will pick up momentum sooner than later.
  • The RBI did the heavy lifting through five consecutive lowering of repo rate along with liquidity infusion programmes.
  • However, monetary-fiscal linkages are crucial to catalyse the demand.

Crucial role played by the RBI

  • While being cautious of inflation, the RBI has decided to continue the accommodative stance in its latest monetary policy to support growth.
  • The CPI inflation after crossing 7% has cooled off to 4.6% in December.
  • Still, the real interest rates remain very low.
  • The efficacy of the new monetary framework (NMF) — the agreement between the RBI and Government of India in February 2016 to adopt inflation targeting in India — will be reviewed in March 2021, and we flag the need for revising the framework.
  • The RBI is continuing its liquidity infusion programmes including the on-tap Targeted Long Term Repo Operations (TLTRO).
  • This programme announced on October 9, 2020 for five stressed sectors has been extended to 26 stressed sectors notified under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0).
  • The RBI is also continuing its ‘operation twist’  with Open Market Operations (OMO) of ₹10,000 crore scheduled for December 17, 2020.
  • Nevertheless, the RBI Governor has rightly pointed out that the signs of recovery are far from being broad-based.

Stimulus for targeted state intervention

  • According to the International Monetary Fund’s Fiscal Monitor Database of Country Fiscal Measures, the fiscal stimulus for India is 1.8% of GDP.
  • The IMF, in its Fiscal Monitor, highlights the need to scale up public investment to ensure successful reopening, boost growth and prepare economies for the future.
  • What we need is stimulus not based on “business cycle” but from the perspective of much needed targeted state interventions in public health, education, agriculture and physical infrastructure, and to redress widening inequalities.
  • As private final consumption expenditure is sluggish, contracting 26.7% and 11% in Q1 and Q2, respectively, a “fiscal dominance” is expected in India for sustained economic recovery.
  • However, India cannot afford fiscal stimulus at the rates of advanced economies, due to a lack of fiscal space.

Way forward

  • Plummeting private corporate investment in India is a matter of concern.
  • The fear of financial crowding out emanating from high fiscal deficit is misplaced in the context of India.
  • Economic recovery will be determined by the degree of containment of the pandemic and the sustained macroeconomic policies.
  •  Any abrupt withdrawal of ongoing economic policy support, both by the monetary and fiscal authorities, will be detrimental to growth in times of the pandemic.
  • The fiscal rules at the national and subnational government levels need to be made flexible.

Consider the question “Recovery of Indian economy battered by the pandemic has not been complete. Suggest the fiscal measure to be adopted by the government to speed up the recovery.”


The fiscal stimulus needs to continue in FY 2021-22 to speed up India’s recovery along with the measures suggested above.

Government Budgets

What are Off-Budget Borrowings?


From UPSC perspective, the following things are important :

Prelims level : Off-budget borrowing

Mains level : Union Budget

Finance Minister is all set to present the Union Budget 2021 on February 1st with all eyeing on off-budget borrowings to reduce Fiscal Deficit.

Try this PYQ:

With reference to the Union Government, consider the following statements:

  1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the Parliament.
  2. No amount can be withdrawn from the Consolidated Fund of India without the authorization from the Parliament of India.
  3. All the disbursements made from Public Account also need authorization from the Parliament of India.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

What are off-budget borrowings?

  • Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution that borrows on the directions of the central government.
  • Such borrowings are used to fulfill the government’s expenditure needs.
  • Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — so that it is not counted in the calculation of fiscal deficit.
  • But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.
  • As a result, a CAG report of 2019 pointed out that this route of financing puts major sources of funds outside the control of Parliament.

Eyes on fiscal deficit

  • One of the most sought after details in any Union Budget is the level of fiscal deficit.
  • It is essentially the gap between what the central government spends and what it earns. In other words, it is the level of borrowings by the Union government.
  • This number is the most important metric to understand the financial health of any government’s finances.
  • As such, it is keenly watched by rating agencies — both inside and outside the country. That is why most governments want to restrict their fiscal deficit to a respectable number.
  • One of the ways to do this is by resorting to “off-budget borrowings”.

How much would the borrowings be?

  • According to the last Budget documents, in the current financial year, the Centre was set to borrow Rs 5.36 lakh crore.
  • However, this figure did not include the loans that public sector undertakings were supposed to take on their behalf or the deferred payments of bills and loans by the Centre.

How are off-budget borrowings raised?

  • Issuance of Bonds: The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds.
  • Utilizing savings: For example, the food subsidy is one of the major expenditures of the Centre. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund.
  • Borrowing: Other PSUs have also borrowed for the government. For instance, public sector oil marketing companies were asked to pay for subsidized gas cylinders for PM Ujjwala Yojana beneficiaries in the past.
  • Bank sources: Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertilizer subsidy.

Its implications

  • Given the various sources of off-budget borrowing, the true debt is difficult to calculate.
  • For instance, it was widely reported that in July 2019, just three days after the presentation of the Budget, the CAG (cumulative aggregate growth) pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46%.

Government Budgets

Good economics must also make good politics


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Reforms for economic growth

The article suggests the reforms that should be included in the next budget to boost the Indian economy.

Need for further reforms

  • Government has leveraged the Covid-19 slowdown as an opportunity for introducing transformative reforms.
  • The recently introduced reforms include liberalising agricultural markets, diluting the onslaught of labour laws, credit guarantees for SME loans, and a liberal PLI to stimulate manufacturing.
  • These reforms have created a cautious optimism among investors worldwide awaiting the forthcoming Budget.
  • India’s reforms require further acceleration, and a consensus that good economics makes good politics.

Reforms required to attract investment

  • Cost of acquiring land has increased substantially, which needs to be reduced.
  • The government must categorise 44 central laws into compensation, social security, industrial relations, and health and safety—and draft a unified model labour law to replace archaic laws for adoption by states.
  • India’s trade-to-GDP ratio must improve.
  • Having turned away from the RCEP, India needs to conclude trade agreements with the UK and other major economies. Announcing such intent would be welcome.
  • Effective corporate tax rate for domestic companies is 25.17%, while that for foreign firms is 43.68%, India should maintain tax parity across domestic and foreign companies.
  • With such parity, India will enhance investment attractiveness.
  • In view of the recent international arbitration rulings, India should discontinue retrospective taxation.
  • Defence FDI could be raised from 74% to 100% under automatic route.
  • The rationale to maintain FDI in the insurance sector at 49% now holds limited logic, India could increase it to a majority stake or even 100%.
  • Bottled-in-origin and bulk spirits attract a high basic customs duty (150%), deterring companies eyeing the Indian market, and depriving India of the corresponding FDI.
  • Phased reduction of duty on these products to 75% and finally to 30% is advisable.

Areas that need increased spending

  • Spending on public healthcare needs to rise from 1.3% to 3% of GDP with Covid-19 exposing glaring inadequacies.
  • Revising the National List of Essential Medicines to exempt inexpensively-priced medicines from price controls would help investments in innovation and API manufacturing.
  • If the New Education Policy is to be implemented properly, public spend on education and skill development must rise from 3% to 4.5% of GDP.
  • The government must raise defence allocations to over 2.5% of GDP given India’s new threat perceptions and increase capital component of total fiscal allocations for defence could be increased from 34% to 40%.

Other measures to boost the economy

  • Developing data adequacy agreements with the UK and other key countries would facilitate cross-border movement of personal data based on a mutual adequacy basis.
  • The online gaming industry should be supported by a model law, tax regime and self-regulation so that the government accrues tax revenues estimated at Rs 15,000 crore.
  • Most countries tax domestic corporate dividends at lower rates and, therefore, FPIs’ dividend income should be taxed at 10%.
  • Foreign banks must be brought at par with Indian banks with 8.5% deduction for NPA provisioning.
  • Excluding financial services from the e-commerce equalisation levy would be appropriate.
  • PSU disinvestments have slowed, and the Budget needs to announce measures for their acceleration as a privatisation push would be transformative for India in the long run.

Consider the question”What are the hurdles in making India the more attractive to the investors? Discuss the measures to make India more attractive for investors.” 


As developed countries contemplate relocating their manufacturing supply chains to destinations besides China, a progressive Budget would send positive signals to overseas investors and would propel India’s rightful ambition to be the world’s next manufacturing workshop, in consonance with the Atmanirbhar Bharat vision.


Government Budgets

Improving fiscal situation through budget


From UPSC perspective, the following things are important :

Prelims level : Kisan Credit Cards

Mains level : Paper 3- Enhancing credit flow to small and marginal farmers

The budget could be an opportunity to increase the consumption which has been impacted by the pandemic and still continues to show the declining trends.

Continuing decline in consumption

  • The first advance estimates of GDP for 2020-21 are much better than the earlier market consensus.
  • The demand side, however, continues to be in a decline with private consumption falling by 9.5 per cent and its share in the overall GDP reducing by full 100 basis points.
  • Per capita private consumption has contracted by 10.4 per cent, while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.
  • Only government consumption remains in positive territory.

What should be the growth in nominal GDP for 2021-22?

  • In terms of specific numbers, the average growth in nominal GDP for the decade ending in 2013-14 was 15 per cent, but the average GDP deflator at 7.6 per cent far outpaced average real GDP at 6.8 per cent.
  • For the six year period ending in 2019-20, average nominal GDP growth was 10.4 per cent, with real GDP growth of 6.8 per cent far outpacing the GDP deflator at 3.6 per cent.
  • It is thus extremely important that we ensure that the current inflation trajectory is kept under control through policy interventions.

Policy recommendations for the farmers

1) Changing condition for renewal of loan on Kisan Credit Cards

  • Out of the outstanding bank credit of about Rs 12 lakh crore to the agriculture and allied activities sector, Rs 7 lakh crore is for Kisan Credit Cards.
  • The KCC portfolio of banks is under stress over the years due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product.
  • Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention.
  • It is proposed that for renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakh, the payment of interest must be a sufficient condition for renewal as with other loans.
  • The above measure has the potential to reduce the credit cost for banks considerably on KCCs as NPAs can be prevented more easily and the interest rate on KCC loans can be further reduced.

2) Formalise tenancy and provide credit to tenant farmers

  • There are 11.5 crore farmers who are PM-KISAN beneficiaries — 6.5 crore farmers have KCC.
  • Thus, the remaining 4-5 crore could be land owning cultivators and at least 3-4 crore of such could be tenants/lessees/landless.
  • Currently, such tenant farmers are not formalised into the credit deliveries of scheduled commercial banks.
  • As of now, it requires state interventions for tenancy certificates which is only available in Andhra Pradesh.
  • Formation of a SHG model under the Deen Dayal Antodoya Yojana will formalise tenancy even without formal documentation of tenancy.
  • This will enable formal lending to take place to three crore landless farmers.

3) Increasing investment in health and education

  • For health, it government could introduce medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy.
  • For the record, the size of the health insurance is Rs 32,000 crore and the savings bank interest is Rs 1.15 lakh crore.
  • The government should also consider exempting all retail and health insurance products from GST.

Three suggestions on the fiscal situation

  • First,Withdraw all tax appeals.
  • Second, accept all domestic arbitration decisions against government departments/agencies.
  • Third, clear all outstanding dues to all parastatal agencies within a stipulated time.
  • This will be a milestone structural administrative change that could be even thought of as a one-time balance sheet entry recognising liabilities and paying them off.
  • As a consequence, we could jump multiple positions on the Ease of Doing Business rankings.


By implementing these steps in the budget the government could use this opportnity to stimulate the economy and aid the economic recovery.

Government Budgets

What is “Direct” Monetization of Deficit?


From UPSC perspective, the following things are important :

Prelims level : “Direct” monetisation of the deficit

Mains level : Various tools for deficit financing and their feasiblity

With the economy stalled, there isn’t enough money in the market for the government to borrow. Can it ask the RBI to print more money? How does this process work, and what are the arguments against it? Let us see:

Discuss the scope and feasiblity of “Direct” Monetization by the government for Deficit Financing as an option of the last resort.

For more help, Click here

What is “direct” monetisation of the deficit?

  • Imagine a scenario where the government deals with the RBI directly — bypassing the financial system — and asks it to print new currency in return for new bonds that the government gives to the RBI.
  • Now, the government would have the cash to spend and alleviate the stress in the economy — via DBT to the poor or starting social and capital expenditure etc.
  • In lieu of printing this cash, which is a liability for the RBI (recall that every currency note has the RBI Governor promising to pay the bearer the designated sum of rupees), it gets government bonds.
  • Such bonds are an asset for the RBI since such bonds carry the government’s promise to pay back the designated sum at a specified date.
  • And since the government is not expected to default, the RBI is sorted on its balance sheet even as the government can carry on rebooting the economy.

What triggers a demand for direct monetization?

1) Decline of Demand

  • With a nationwide lockdown, incomes have fallen and so have consumption levels.
  • In other words, the demand for consumer goods and services (say a haircut) in the economy has gone down.
  • What can be done to boost demand? People need to have money. But, of course, who will give them money.
  • From the highest-ranking CEOs to stranded workers, incomes have taken a huge hit, if not completely dried up.

2) Moving ahead for a fiscal deficit

  • For its part, the RBI has been trying to boost the liquidity in the financial system. It has bought government bonds from the financial system and left it with money.
  • Most banks, however, are unwilling to extend new loans as they are risk-averse. Moreover, this process could take time.
  • The government’s finances were already overextended going into this crisis, with its fiscal deficit way over the permissible limit.
  • On top of that, if the government was to provide some kind of a bailout or relief package, it would have to borrow a huge amount. The fiscal deficit will go through the roof.

3) No money in the market

  • There isn’t enough money in the market for the government to borrow.
  • Moreover, as the government borrows more from the market, it pushes up the interest rate.
  • Hence, the govt. is left with the only solution — the “direct” monetisation of government deficit.

How is DM different form OMOs?

  • Direct monetization is different from the “indirect” monetizing that RBI does when it conducts the so-called Open Market Operations (OMOs) and/ or purchases bonds in the secondary market.

Global examples

  • Other countries are doing it to counter the economic crisis related to COVID-19.
  • In the UK on April 9, the Bank of England extended direct monetisation facility to the UK government even though the Governor of the Bank opposed the move till the last moment.

Has India ever done this in the past?

  • Yes, until 1997, the RBI “automatically” monetized the government’s deficit.
  • In 1994, Manmohan Singh (former RBI Governor and then Finance Minister) and C Rangarajan, then RBI Governor, decided to end this facility by 1997.
  • Now, though, even Rangarajan believes that India would have to resort to monetising the deficit.

Issues with Direct monetisation

  • Direct monetisation of the deficit is a highly contested issue.
  • Another former RBI Governor D Subbarao has said that there is no question that India must borrow and spend more in this crisis.
  • He regarded this as a moral and a political imperative.

Issues: Inflationary practice

  • Ideally, this tool provides an opportunity for the government to boost overall demand at the time when private demand has fallen — like it has today.
  • But if governments do not exit soon enough, this tool also sows the seeds for another crisis. Here’s how:
  • Government expenditure using this new money boosts incomes and raises private demand in the economy. Thus, it fuels inflation.
  • A little increase in inflation is healthy as it encourages business activity. But if the government doesn’t stop in time, more and more money floods the market and creates high inflation.

To what level should government debt be ideally limited?

  • While no ideal level of debt is set in stone, most economists believe developing economies like India should not have debt higher than 80%-90% of the GDP. At present, it is around 70% of GDP in India.
  • It should commit to a pre-determined amount of additional borrowing and to reversing the action once the crisis is over.
  • Only such explicitly affirmed fiscal restraint can retain market confidence in an emerging economy.
  • The other argument against direct monetizing is that governments are considered inefficient and corrupt in their spending choices — for example, whom to bail out and to what extent.

Government Budgets

A plan for the aftermath


From UPSC perspective, the following things are important :

Prelims level : Fiscal deficit. Monetisation of deficit.

Mains level : Paper 3-Suggest the option to get the resources for dealing with the corona pandemic.


Everyone is agreed that the whole world is hurtling towards an unprecedented economic recession. India, already facing a massive slowdown, is going to get hurt perhaps more than the others, because our economic immune system is already weak.

Three things that we must do in the present situation

  • The first is containing the spread of the virus.
  • Apart from the manpower, medicines, protective equipment for frontline workers and other methods, it will need massive resources to tackle it.
  • Second, the poor are already suffering in more ways than one, including the daily wage earners. They will have to be taken care of, again needing massive resources.
  • Third, economic activity will have to be revived as soon as conditions return to normal or near-normal, for which businesses will have to be helped, again needing massive resources; both in terms of revenue foregone and actual cash outgo.
  • The question, therefore, on everyone’s mind is how much money will be needed for all this and where will it come from?
  • What the government and the RBI have done so far is clearly awfully inadequate. Other countries have done much more. India can be no exception.

Where will the government will get resources?

  • Partly from market and partly form RBI: Broadly speaking, resources will come partly through market borrowings and partly from the RBI.
  • Manmohan Singh had decided in 1994 that in future the government of India would not monetise its deficit; in other words, would not borrow from the RBI but go to the money market and borrow from there.
  • Borrow from the RBI: In these unprecedented times, we may take leave from that very sound principle, which all governments have followed religiously since then, and borrow from the RBI.
  • What does it mean? This means printing of more currency notes with all its attendant problems including inflation.
  • Government of India will have to take the steps necessary to tackle the after-effects to the extent possible. It must ensure that the supply chains work smoothly.

How will the money be spent?

  • The Important role of states: The states will have to play a very important role in this, as much of the work will have to be done by them.
  • Responsibility of finance commission: Since the finance commission continues to be in existence and has a clear idea of the state finances, it should be immediately tasked with the responsibility of discussing this matter with the state governments and making its recommendations available within a period of one month.
  • The task force under the finance minister could work out the needs of businesses and the government of India both in the short as well as the medium term.
  • Spending money properly and efficiently: It should not be wasted and each rupee spent creates its own multiplier effect.
  • Our system leaves much to be desired. And the moment it is known that funding is not a constraint, the system can go berserk.
  • We must guard against that and ensure that rules are in place, specially at the field level to ensure the proper use of resources.

Role of banks, financial institutions and MGNREGA

  • The banks and other financial institutions will have to be provided with resources to help the private sector, especially the agricultural and MSME sectors.
  • In the rural areas, we must ensure that durable assets are created out of the funds made available.
  • The rules governing the MGNREGA scheme should be tweaked to the extent necessary in order to ensure that more material than labour is used wherever necessary.


India should and can come out of the present crisis with as little damage as possible if we tackle it together. We cannot control what happens in other countries, but we can surely learn from them and adopt their best practices. We must also play our role in defining the new global order because the world is more intertwined now than ever before.

Government Budgets

Financing the pandemic rescue package


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3-Options that government explore to finance the package announced in the wake of corona epidemic.


The priority for India is to ensure that it overcomes the COVID-19 pandemic and kick-starts GDP growth.

Financing strategy for the 1.7 lakh crores package

  • Rather than fix the weaknesses in the macroeconomy: a high fiscal deficit of 7.49% and government indebtedness that was 69% of GDP in 2019, the government wants to overcome the pandemic.
  • When COVID-19 cases began to increase, the Government of India (GoI) swung into action by announcing a 21-day national lockdown and a ₹1.7-lakh crore (approximately $22.59 billion) rescue package.
  • Financing strategy: Available in the state disaster relief fund is ₹60,000 crore, comprising ₹30,000 crore of the outstanding balance and the Central government’s allocation of a similar amount for FY2021.
  • Hence, the GoI needs to raise an additional ₹1.1-lakh crore,e., 65% of the rescue package outlay.
  • Its financing strategy should be to raise long-term funds at cost-effective rates, with flexible repayment terms that allow it to take tactical advantage of market movements.
  • Following are some of the options that the government can explore to raise the required amount.

1. GDP-linked bonds

  • The GoI may issue listed, Indian rupee-denominated, 25-year GDP-linked bonds that are callable from, say, the fifth year.
  • What GDP-linked means? The coupon (interest) on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap.
  • The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
  • The callable feature from the fifth year till maturity allows the GoI to effect partial repayments during high growth years and when it earns non-recurring revenues such as proceeds from disinvestment of public sector enterprises (PSEs).
  • The listing of bonds provides investors with an exit option.
  • Examples from the world: Costa Rica, Bulgaria and Bosnia-Herzegovina issued the first pure GDP-linked bonds in the 1990s.
  • Argentina and Greece issued warrant-like instruments similar to GDP-linked bonds in 2005 and 2012 respectively. India could learn from their experience.
  • Timely GDP data is a prerequisite: Publishing reliable and timely GDP data is a prerequisite for the successful issue of GDP-linked bonds, which the GoI may use to part-finance the COVID-19 rescue package and to diversify its borrowing sources.

2. Streamlining PSEs

  • The 15 largest non-financial central PSEs (CPSEs) in the S&P BSE CPSE index contributed approximately 75% of the GoI’s ₹48,256.41 crore dividend income from PSEs in FY2020.
  • The Union Budget projected PSE dividends to increase by 25% to ₹65,746.96 crore in FY2021.
  • This milestone is unlikely to be achieved in the current environment.
  • The 15 CPSEs have accumulated sizeable non-core assets including financial investments, loans, cash and bank deposits in excess of their operating requirements, and real estate.
  • The return on these assets (excluding real estate) is around 200 basis points lower than the returns on their core businesses.
  • These CPSEs owe the government ₹25,904 crore as of end-March 2019.
  • These non-core assets must be monetised to repay statutory dues and upstream dividends to GoI.
  • Formation of HOLDCO: While loans and excess cash and bank deposits may be monetised within three months, streamlining investments and selling real estate is a time-consuming process.
  • It is imperative for the GoI to form a PSE and public sector bank holding company (‘Holdco’) along the lines of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Berhad.
  • The Holdco will enable PSEs to monetise their non-core assets at remunerative prices, maximise their enterprise value and focus on their core businesses.
  • The ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates may be securitised or refinanced, with CPSEs guaranteeing loans extended to weak counterparties.
  • Excess liquidity with PSEs: It is essential that businesses maintain liquidity, especially during a downturn. However, the outstanding cash and bank deposits of the 15 CPSEs (₹64,253 crore) is in excess of their operating requirements.
  • CPSEs must determine the cash they require to meet, say, six months of operating expenses and use the excess cash to repay statutory dues and upstream dividends to the GoI.
  • Banks must extend to CPSEs committed lines of credit that the latter may draw down during exigencies.
  • Financial investments of PSEs be transferred to HOLDCO: The 15 CPSEs have accumulated ₹93,562 crore financial investments comprising listed and unlisted debt, equity and mutual fund units.
  • These exclude investments in associates and joint ventures.
  • The CPSEs ought to transfer these investments to Holdco, which can manage the portfolio and transfer the returns to the original investors.
  • Real estate holdings of PSEs: One important non-core asset, whose value is likely to exceed the combined value of other non-core assets, is the real estate holdings of PSEs.
  • In September 2018, the GoI identified properties of nine PSEs (Air India, Pawan Hans, Hindustan Fluorocarbons, Hindustan Newsprint, Bharat Pumps & Compressors, Scooters India, Bridge and Roof Co, Hindustan Prefab, and Projects & Development India) to be divested.
  • The GoI must mandate all PSEs and government departments to transfer their non-core properties to Holdco, which can opportunistically sell these properties and transfer the proceeds to the owners.

Refrain from asking RBI to pay more dividend

  • The Reserve Bank of India (RBI) has allocated ₹1 lakh crore to carry out long-term repo operations in tranches and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of the pandemic.
  • Recognising the RBI’s liquidity requirements, the GoI must refrain from asking the RBI to pay more dividends that it can viably pay.
  • During the five years ending on June 30, 2019, the RBI paid the GoI 100% of its net disposable income, with its FY2019 dividends more than trebling to ₹1.76 lakh crore from ₹50,000 crore in FY2018.
  • The Bimal Jalan panel constituted in 2019 to review the RBI’s economic capital framework opined that the RBI may pay interim dividends only under exceptional circumstances and that unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends.


The Bimal Jalan panel recommendation must be adhered to in letter and spirit. The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets.

Government Budgets

A different economic approach


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How to balance the trade-off between the health of economy and public health.


The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

The debate over lockdown

  • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
  • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
  • More than half the GVA is contributed by the unorganised sector.
  • A disproportionate burden of the economic cost has fallen on this large segment.
  • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
  • Is it worth sacrificing the economy to save lives?
  • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

So, what should be the policy objectives?

  • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
  • A prolonged lockdown will extract a huge economic cost.
  • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
  • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

1 The policy of aggressive testing and isolation

  • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
  • For it to work, people must be tested in large numbers.
  • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
  • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
  • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

2 Ramp up the manufacturing capacity

  • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
  • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
  • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
  • Problem-solving of an unprecedented order will be required.
  • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
  • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
  • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
  • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

Way forward

  • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
  • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
  • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
  • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
  • The economic pain of combating the virus will reduce.
  • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
  • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
  • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
  • This has removed the incentive for private labs to ramp up capacities.
  • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.

Government Budgets

A niggardliness that is economically unwarranted


From UPSC perspective, the following things are important :

Prelims level : Fiscal deficit and its relation with inflation, CAD etc.

Mains level : Paper 3- Should India consider a package to ease the sufferings inflicted by the covid-19 even at the cost of large fiscal deficit?


The Centre can afford to step up its COVID-19 assistance to a higher scale; fiscal deficit is no worry.

Comparison with the US

  • Unemployment benefit in the US: In the United States, for instance, where the lockdown has raised the number of persons filing unemployment claims from 2.8 lakh to 6.6 million in a matter of days, those affected can fall back on unemployment benefit.
  • Comparison of packages: The US government has approved a package of ameliorative steps costing roughly 10% of that country’s GDP to cope with the crisis.
  • In India by contrast, the Finance Minister’s package comes to less than 1% of its GDP; and much of it is just a repackaging of already existing schemes.
  • New expenditure comes to just a little over half of the ₹1.7-lakh crore earmarked for the package.
  • Migrant workers are not the beneficiary: Besides, none of the steps will help the migrant workers; not even the larger foodgrain ration which in principle could, because most of them would have ration cards back home rather than in the places where they stay.

What can be done?

Consider the cash transfer

  • Many economists and civil society activists had suggested a cash transfer of ₹7,000 per month for a two-month period to the bottom 80% of households to tide over the crisis, in addition to enhanced rations of foodgrains and the inclusion of certain other essential commodities within the ration basket.
  • The cost of their proposed cash transfers alone would come to ₹3.66-lakh crore, which is more than 10 times the cash transfers provided in the Finance Minister’s package.
  • Providing assistance on the scale proposed by civil society organisations is necessary; it will no doubt pose logistical problems, but not financial problems.
  • Two possible effects of cash transfer: Even if all of it is financed through a fiscal deficit for the time being, the economic implications of such an enlarged deficit would not be forbidding.
  • These implications can manifest themselves in two ways: one is through inflation, and the other by precipitating a balance of payments problem. Let us consider each of these.

   Effect of cash transfer on inflation

  • As long as supplies of essential commodities are plentiful and these are made available through the Public Distribution System to the vast majority of the people so that they are insulated against the effects of inflation, any inflation per se should not be a matter of great concern. This is the case in India at present.
  • Foodgrain stocks with the FCI: The supply of the most essential of goods, food grains, is plentiful. Currently, there are 58 million tonnes of foodgrain stocks with the government, of which no more than about 21 million tonnes are required as buffer-cum-operational stocks.
  • This leaves a surplus of 37 million tonnes which can be used for distribution as enhanced ration, or for providing a cushion against inflation.
  • The rabi crop is supposed to be good; as long as it is safely harvested, this would further boost the government’s food stocks.
  • Rise in demand of other commodities: Likewise, the supplies of other essential commodities which consist of manufactured goods and where output has been demand-constrained all along will get boosted in response to higher demand; and in special cases, imports may have to be resorted to.
  • There is in short no reason to think that inflation of a worrisome magnitude will follow if the fiscal deficit is increased.
  • What about the multiplier effect? There is an additional factor here. The increase in total demand caused by an initial increase in demand, which is financed by a fiscal deficit, is a multiple of the latter.
  • Now in a situation like the present, when even if the lockdown is lifted social distancing and restrictions on social activities will continue, the value of the multiplier will be lower than usual.
  • People, in short, would hold on to purchasing power to a much greater extent than usual because of the continuing restrictions on demand, which would act as an automatic anti-inflationary factor.
  • Of course, there will be shortages of some less essential commodities and also hoarding on account of such shortages. But since these shortages will be expected to be temporary, a result of the pandemic unlikely to last long, there will be a damper on hoarding.

Effect of cash transfer on deficit

  • The price rise of non-rationed commodities: If inflationary expectations are strong and persistent, then the prices of non-rationed commodities may rise sharply for speculative reasons.
  • How the government can prevent the price rise? But the government can prevent such expectations, by adopting measures such as bringing down petro-product prices, taking advantage of the collapse of world oil prices.
  • A larger fiscal deficit, therefore, need not cause disquiet on account of inflation.
  • Balance of payment issue: On the balance of payments front, the worry associated with a larger fiscal deficit is financial flight caused by frightened investors.
  • Some financial flight is already happening, with the rupee taking a fall.
  • Rush to dollar: This flight is not because of our fiscal deficit but because, whenever there is panic in financial markets, the tendency is to rush to dollars, even though the cause of the panic may lie in the United States itself.
  • Using foreign exchange reserves: India has close to half a trillion dollars of foreign exchange reserves. These can be used, up to a point, to check the flight from the rupee to the dollar.
  • Restriction on capital outflow: If the flight nonetheless persists, then India will have a legitimate reason for putting restrictions on capital outflows in the context of the pandemic.

Way forward

  • The Centre must not worry about its fiscal deficit; and since the State governments will bear a substantial expenditure burden on account of the pandemic.
  • The Centre must make more resources available to the states.
  • The centre should raise their borrowing limits, perhaps double their current limits as a general rule, apart from negotiating the magnitude of fiscal transfers it should make towards them.


If the hardships of the people are not ameliorated through larger government expenditure, because of the fear that the larger fiscal deficit required for it would frighten finance into fleeing, then the privileging of finance over people would have reached its acme.


Government Budgets

States at centre


From UPSC perspective, the following things are important :

Mains level : Paper 3- Financial stress on the states and what centre should do to address the problem.


Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.

State finances showing the signs of stress

  • The fiscal crisis stemming from the disruption in economic activity due to the coronavirus is now beginning to show.
  • Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.
  • The stress to state finances stems from multiple sources.
  • First, as economic growth falters, their own income streams, for instance, revenues from petroleum products, real estate transactions, will slow down further, as will GST collections, and the amount collected through the compensation cess will not be enough to meet budgeted expectations.
  • Second, as the Centre’s own revenues also slow down, transfers to states will take a hit. It is quite likely that tax devolution to states, which has been budgeted at Rs 7.8 lakh crore in 2020-21, will not materialise.
  • Collectively, state expenditure far outstrips that by the Centre, with revenues falling short, any cutbacks in their spending, at a time when there is a need for a bold fiscal expansion, will further aggravate the economic stress.
  • Need assurance of adequate resource: Thus, states, which are at the frontline of fighting the public health crisis, need to be assured of adequate resources.

Increase in the WMA limit will not address the issue

  • Limit increased by 30%: The Reserve Bank of India decided to increase the ways and means advances (WMA) limit by 30 per cent for state governments.
  • What is WMA? The WMA is a temporary liquidity arrangement with the RBI which helps governments tide over their short-term liquidity woes.
  • A short term measure: While states have been averse to opting for this facility in the past, and the new WMA limits may need to be revised further if the mismatch rises, this is a short-term measure, and does not address the underlying issue of significant revenue slippages.
  • Contradictory impulse: Under the existing fiscal deficit constraint, the collapse in revenues will force states to cut back on spending, imparting a contractionary impulse to the economy.

Way forward

  • The Centre must take several steps to ensure an adequate flow of resources to states.
  • First, it must immediately clear all its pending dues to state governments.
  • Second, while it is cheaper for the Centre to borrow and transfer to states, even though the spreads between state and central government bonds have now widened, making state borrowing more costly, states must be allowed to borrow more.
  • Third, as some state chief ministers have suggested, the fiscal deficit limits imposed on states must be relaxed.

Government Budgets

A prescription for revival


From UPSC perspective, the following things are important :

Mains level : Paper 3-Measures to revive the Indian economoy.


The root cause of the present malaise in our economy is the “death of demand”.

How demand matters for growth?

  • The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
  • How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.

What needs to be done to break the vicious cycle?

  • What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
  • Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.

Demand in India

  • No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
    • We still have to provide so many goods and services to our people in order to improve their “quality of life”.
  • Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
  • How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
  • Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
    • Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.

How the government should deal with the situation

  • Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
    • Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
  • Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
    • But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
    • What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
    • The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
    • In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.

Figures of the latest budget and need for the reforms

  • Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
  • The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
  • Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
    • Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
    • How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.


A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.

Government Budgets

Shun fiscal adventurism


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Why fiscal stimulus is not the elixir as it is made out to be?


In the run-up to the budget, there was enormous pressure on the finance minister to launch a fiscal stimulus so as to pump-prime the economy. That she did not succumb to the temptation is a big relief.

Why fiscal stimulus is unwarranted?

  • There is already considerable stimulus in the system. 
  • Excessive fiscal deficit: To her credit, the finance minister took a step towards transparency by admitting to off-balance-sheet borrowings of 0.8 per cent of GDP for both the current and next fiscal year.
    • Acknowledging that the fiscal deficit would actually be higher at 4.6 per cent and 4.3 per cent of GDP respectively. This is already excessive.
  • Unrealistic projection of revenue growth: Add to this the unrealistic projections of revenue growth and disinvestment proceeds for next year and we have a potentially unsustainable fiscal situation.
    • Any stimulus on top of this would have been clearly

Possibility of undermining the RBI’s efforts

Fiscal pressure could harm the RBI’s efforts to revive the economy in the following ways-

  • Harming long term investment rates: Fiscal pressures will undermine the Reserve Bank of India’s struggle to revive investment by bringing down long-term interest rates.
  • Rating downgrades: It could result in a sovereign rating downgrade and jeopardise efforts to attract foreign capital.
  • Increase in inflationary pressure: It can stoke inflationary pressures, something we cannot afford when inflation is above the RBI’s target rate.
  • Pressure on the external sector: And most importantly, it can lead to pressures on the external sector.
  • Past experiences: The balance of payments crisis of 1991 and the near crisis of 2013 in the wake of taper tantrums were, at their heart, a consequence of extended fiscal profligacy.

Counter-arguments of the supporters of the stimulus and fallacies in it

  • Low Debt-to-GDP ratio: It is argued that our debt-to-GDP ratio is low in international terms.
    • Misleading comparison: The data don’t bear this out. In any case, our experience, as well as research, shows that international comparisons of debt-to-GDP ratios, without reference to other parameters, are misleading.
  • Debt in domestic currency: It is also argued that we do not need to worry because our debt is mostly in domestic currency unlike that of many emerging economies.
    • The fallacy in this argument: Our debt in the domestic market didn’t protect us from previous crises, and there is no reason to believe that it will protect us from the next one, especially as our foreign debt is proportionally higher than before.
  • Robust foreign exchange reserves: It is argued that our foreign exchange reserves are robust and a balance of payments crisis is improbable. Such complacency is misplaced.
    • Fallacy- No forex is large enough in bad times: We should not forget the lesson that in good times any amount of forex reserves looks like it is too large, but in bad times no amount of reserves is large enough.

Quality of fiscal consolidation

  • Quality a cause for concern: As much as the headline fiscal deficit numbers are a cause for concern, the underlying quality of fiscal consolidation is a bigger concern.
  • Increasing revenue deficit: Conveniently off the radar, the revenue deficit, far from coming down, is actually going up.
    • Two-third borrowing to finance revenue expenditure: This year, more than two-thirds of what the government is borrowing is going to finance current expenditures like salaries, pensions, interest payments and subsidies.
    • That ratio will rise to three-quarters next year.
    • Crowding out of the expenditure: This debt-financed revenue expenditure is simply unsustainable as it will increasingly crowd out capital expenditure.
  • Red flags on the state finances.
    • Another dimension of the quality of fiscal consolidation is the combined fiscal position of states which is, in fact, the big elephant in the room.
    • Together, states spend one-and-a-half times more than the Centre.
    • Larger development impact than Centre: Studies show that how efficiently states spend their money has a much greater development impact as compared to the Centre.
    • Red flags by the RBI on states finances: The states are not doing a good job. In its latest annual report on state finances, the RBI raised several red flags on state finances-
    • states’ increasing weakness in their own revenue generation.
    • Their unsustainable debt burdens.
    • And their tendency to retrench capital expenditures in order to accommodate fiscal shocks such as farm loan waivers, power sector loans under UDAY and a host of income transfer schemes.
    • Consequences in the market: The market will penalise mismanagement of public finances; it does not care who is responsible — the Centre or states — for an unsustainable fiscal stance.


  • The fear of one-off fiscal stimulus becoming permanent: By far the biggest fear about a fiscal stimulus is that it is tempting to plunge into a spending programme saying it is a one-off and will be withdrawn when the pressure eases. Experience shows that it is very difficult to bail out. It is good that the finance minster avoided doing any such thing.
    • As Milton Friedman famously said, there is nothing more permanent than a temporary government programme.
  • Need to kick-start the private investment: What the economy needs for a sustained turnaround is kick-starting private investment.
    • Implementation of reforms: A necessary condition for inspiring investor confidence is the implementation of structural and governance reforms. This will be a long-haul.
    • That the budget did not launch the journey is a big disappointment. But, at least, the budget did not make a bad situation worse by embarking on fiscal adventurism.
    • It’s better, as Keynes said, to be roughly right than precisely wrong.



Government Budgets

[op-ed snap] No rescue in sight


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Government budget- allocations to various sectors-how it could help revive the economy.


The disconnect between Budget and Economic Survey is much greater this year.

Background of the economy as the budget is introduced

  • The 2020 Budget was presented against the background of-
    • Slowing economy.
    • Poor investment climate.
    • Declining consumption demand and
    • Stagnant exports.
    • The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.

Infrastructure investment

  • The hope of substantial increase in allocation for infra: The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising.
    • This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy.
    • Private sector expected to contribute: Much of the investment for this will have to be made by the private sector and it is hoped that the allocation of Rs 20,000 crore in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.

Budgetary allocation for capital expenditure

  • 1.7% of GDP to 1.8 %: The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21.
  • Agriculture, irrigation and rural development: The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent.
    • But the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate.
  • Transport infrastructure: The allocation to transport infrastructure in the Budget- at Rs 1.7 lakh crore-is just 7.6 per cent higher than the revised estimate for 2019-20.
  • MGNREGA and PM-Kisan Samman Nidhi: The allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21.
    • PM Kisan Samman Nidhi: For schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
    • As a consequence, not much is expected in terms of propping up the consumption demand.

Slippage in fiscal deficit

  • Increase in fiscal deficit expected: The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected for the following reasons-
    • Below expected nominal GDP growth: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget.
    • Overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year.
    • Missed disinvestment target: The slippage in achieving the disinvestment target of Rs 1.03 lakh crore.
  • Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent.
  • Off-budget financing: The major concern is that the reported off-budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.

Would the budgeted and revised estimates realise?

  • On disinvestment front: The disinvestment revenue is estimated at Rs 65,000 crore though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months.
  • On tax revenue front: The RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19.
    • This is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.

Tax reforms in the budget

  • DDT abolition: On tax reforms, the abolition of dividend distribution tax (DDT) was expected.
  • Complicating Income tax: The reforms in individual income tax complicates the tax by creating six brackets.
    • The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax.
  • What could have been done? The government could have simply-
    • Phased out the tax concessions.
    • Indexed the brackets for inflation and
    • Reduced the rates of tax with an appropriate adjustment in the brackets.


The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level.

Government Budgets

[op-ed of the day] A workmanlike account


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Government budget, $5tn dollar economy


The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.

Fiscal arithmetic of the Budget

  • A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
    • Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
  • Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
    • Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
  • Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
    • The target is up sharply to Rs 2.25 lakh crore.
    • This initiative has been one of the core focus areas of the government, has to be lauded for-
    • The effects of increasing efficiency in operations and-
    • Restricting the losses to the public balance sheet.
    • Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
  • Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
    • High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.

The slowdown in the economy and squeeze in the credit flow

  • Three aspects of the current slowdown that makes it different
  • FirstMultiple engines of growth have synchronously decelerated-
    • Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
  • Second- Demand led slowdown:
    • This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
  • Thirdthe trigger for this episode was a financial shock-
    • NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
  • Squeeze in the credit flow of the banks
    • Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
    • MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.

Whether the slowdown is more cyclical or structural-conundrum for policymakers

  • If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
    • If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
  • Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
  • Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
    • Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.


Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.



Government Budgets

[op-ed snap] Falling short of aspirations


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Government budget and allocations for various sectors and schemes.


The Budget can be judged in terms of its effect on rural demand, investment and private sentiments– all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

Skill development allocation- 3000 Crore

  • Unmet Demand: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers.
    • Need for quality education and skills: Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills.
    • Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills.
    • Skilling will require massive investment and concerted efforts.
    • What could have been done? The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth.
    • The country cannot afford to let the world’s largest workforce waste this way.

On flagship welfare schemes

  • The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year.
  • PM-KISAN: Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded.
  • Good schemes for increasing demand: These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services.
    • Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
  • Micro-irrigation schemes for 100 water-stressed: Focus of schemes such as micro-irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
  • Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
  • ₹1.7 lakh crore for transportation infrastructure: The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle –to spur job-creating growth.
  • To pull in private investment, public funding should be front-loaded in under-implementation projects.
  • Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

 Bonds Market development  and startups

  • Need for the corporate bond market: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market.
  • No focus on the corporate bond market: The focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange-traded funds in government bonds.
    • Need for the well-developed market: Government’s moves are welcome but not enough. A well-developed bond market should draw upon-
    • Domestic insurance funds.
    • Pension funds and
    • Mutual funds-which are capable of investing in corporate bonds across different schemes.
  • Startups: The other leg of the “aspirational” Budget is the startups.
    • Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome.
    • Reluctance to abolish angel tax: But the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable.

Scheme for NBFC

  • Allowing NBFCs into TReDS: Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS).
    • TReDS is an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

Changes in provisions for SMEs and their problems

  • Audit threshold increased to 5 crore: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crores for those entities that carry out less than 5% of their business transactions in cash.
  • Restructuring window increased: A provision in the budget extended the window for the restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
  • Problems faced by the SMEs
    • Input tax rate higher for input than for the final goods: For many products produced by these enterprises, the tax rates are higher for inputs than the final goods.
    • High taxes on imports and exports: In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

Other provision made to revive the private sector 

  • Recognising the need to revive the dying spirit of the private sector, several provisions have been made in the budget to revive the spirit of the private sector like-
    • Decriminalisation of several civil offences by firms under the Companies Act.
    • The abolition of dividend distribution tax (DDT).
    • The assurance that tax-related disputes will be considered with compassion.
    • The scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity.


Everything considered the future of the economy will turn on whether the government delivers on the promises of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.





Government Budgets

Explained: Fiscal Responsibility and Budget Management (FRBM) Act


From UPSC perspective, the following things are important :

Prelims level : FRBM act

Mains level : Read the attached story


  • As the years have rolled by, fiscal deficit has become a key factor to watch out for in every Budget presentation.
  • It is considered the most important marker of a government’s financial health.
  • A government that abides by the FRBM rules enjoys greater credibility among the rating agencies and market participants – both national and international.


  • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
  • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
  • Subsequently, the FRBM Act was passed in the year 2003.

Features of the FRBM Act

  • It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
  1. Macroeconomic Framework Statement
  2. Medium Term Fiscal Policy Statement and
  3. Fiscal Policy Strategy Statement

Fiscal Indicators

It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement viz.

  1. Revenue deficit as a percentage of GDP,
  2. Fiscal deficit as a percentage of GDP,
  3. Tax revenue as a percentage of GDP and
  4. Total outstanding liabilities as a percentage of GDP

Why FRBM is back in debate?

  • Not letting the fiscal deficit go completely out of control has been one of the standout achievements of the incumbent NDA government.
  • However, as India’s economic growth has decelerated, there have been growing pressures on the government to breach the FRBM orthodoxy and spend in excess of fiscal deficit targets to reboot domestic growth.
  • Others, however, continue to caution that the “real” fiscal deficit is already far more than the official number, and as such, there is no room for further increasing the expenditure by the government.

Which of these narratives is true?

  • Actually, neither. But to understand that one has to first understand what are the different types of deficits and why does it matter to limit them.

Different types of deficits

  • Fiscal is the excess of what the amount the government plans to spend over what the government expects to receive.
  • Obviously, to make up this gap, the government has to borrow money from the market.But all government expenditure is not of the same kind.
  • For instance, if the expenditure is for paying salaries then it is counted as “revenue” expenditure but if it goes into building a road or a factory – that is, something that in turn increases the economy’s capacity to produce more – then it is characterized as “capital” expenditure.
  • The fiscal deficit is another key marker and it maps the excess of revenue expenditure over revenue receipts.
  • The difference between fiscal deficit and revenue deficit is the government’s capital expenditure.

What FRBM says on deficits?

  • As a broad rule, it is considered fiscally imprudent for a government to borrow money for “revenue” purposes.
  • As a result, the FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP, the revenue deficit should be brought down to 0%.
  • This would have meant that all the government borrowing (or fiscal deficit) for the year would have funded only capital expenditure by the government.

Why prefer capital expenditure over revenue expenditure?

  • In any economy, when the government spends money or cuts taxes it has an impact on the economic activity of the country.
  • But this impact (also called the “Multiplier” effect) is quite different for revenue expenditure and capital expenditure.
  • In other words, when the government spends Rs 100 on increasing salaries in India, the economy grows by a little less than Rs 100.
  • But, when the government uses that money to make a road or a bridge, the economy’s GDP grows by Rs 250.
  • The question then is: How to get governments to switch from revenue expenditure to capital expenditure? That’s where the FRBM Act comes in handy.

What is the significance of an FRBM Act?

  • The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding.
  • The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one.
  • In other words, the FRBM Act – by limiting the total fiscal deficit (to 3% of nominal GDP) and asking for revenue deficit to be eliminated altogether – is helping the governments to switch their expenditure from revenue to capital.
  • This also means that – again, contrary to popular understanding – adhering to the FRBM Act should not reduce India’s GDP, rather increase it.

Here’s how: When you cut on revenue deficit – that is, reduce your borrowings for funding revenue expenditure – and instead borrow to only spend on building capital, you increase the overall GDP by 2.5 times the amount of money borrowed. So adhering to FRBM Act is a win-win.

What has been India’s record on adhering to FRBM Act?

  • Between 2004 and 2008, the Indian government had made giant strides on reducing both revenue deficit and fiscal deficit.
  • But this process was reversed thereafter thanks largely to the Global Financial Crisis and a domestic slowdown.
  • Since then, there have been several amendments to the Act essentially postponing the targets.
  • But the worst development happened in 2018 when the Union government stopped targeting revenue deficit and instead focussed only on fiscal deficit.

Way Forward

  • There is a need to revert back to the original FRBM Act if 2003 by recognising and prioritizing the reduction in revenue deficit.
  • Doing this will help the government boost the kind of expenditure that actually increases the GDP.

Government Budgets

[op-ed snap] The stress in state finances


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Effects of low growth rate on the State's finances.


Lower tax devolution, delays in GST compensation are potential risks to the states.

Trends in the finances of the state

  • The unaudited fiscal data of 21 states:
    • These states account for around 90 per cent of India’s GDP in 2017-18. The data reveal some trends.
  • First Trend: Revenue receipt sliding down
    • From 15.6 to 4.6 %: At the aggregate level, revenue receipts of these 21 states have grown by a mere 4.6 per cent, sliding down from 15.3 per cent over the same period last year.
    • Decrease in Central tax devolution: The analysis shows that the states’ share in Central tax devolution has slowed the most, contracting by 2.3 per cent during this period, after having grown by 12.1 per cent over the same period last year.
  • Second trend: The Centre’s gross tax revenues are expected to fall short of the budgeted target by a considerable Rs 3- 3.5 trillion this fiscal year.
    • The aggregate tax devolution to all states may be as much as Rs 1.7 – 2.2 trillion lower in the current fiscal year than what was budgeted.
    • This is a key revenue risk staring at the state governments this year.
  • Third trend: States own tax and non-tax revenue contracting.
    • The states’ own non-tax revenues have contracted by 5 per cent during the first eight months of this fiscal year, after an expansion of 15.3 per cent over the same period last year.
    • Decreasing tax revenue: Growth of states’ own tax revenues, the largest source of their revenue receipts, eased to a tepid 2.2 per cent during this period from a healthy 16 per cent over the same period last year.
    • This is in part by the modest rise in collections of the State Goods and Services Tax (SGST).
  • Fourth trend: Increase in the grants from the Centre
    • The primary factor boosting the GST compensation seems to be the low growth in states’ GST revenues relative to the mandated 14 per cent annual growth for the five-year transition period.

Delay in receipt of the GST collection and the risk

  • Some state has voiced concerns over the delays in receipt of the compensation amount in recent months.
    • The delay has complicated their fiscal position and cash flow management.
    • Risk for the states: The timing of receipt of the compensation is the second major revenue risk facing state governments.
    • If compensation gets delayed to the next fiscal year, we may well find some traditionally revenue surplus states staring at a revenue deficit
    • Case of no GST compensation: But it seems states will have to start gearing up for life without the GST compensation.

The Rise in State Development Loans or Market borrowing by states

  • SDL rising in first three quarters: According to ICRA’s estimates, net SDL issuance of all states and UTs rose by 15.5 per cent to Rs 2,806 billion in the first three quarters of this fiscal year, up from Rs 2,429 billion last year.
    • The combined gross SDL issuance has expanded by a significant 34.9 per cent to Rs 3,874 billion this fiscal year (April-December), up from Rs 2,872 billion last year.
    • The calendar for state government market borrowings for the fourth quarter indicates tentative gross SDL issuances of Rs 2,086 billion in the quarter, implying a moderate 9.1 per cent growth.
    • But, this conceals a large dip in redemptions.
    • Net SDL issuances will expand by a staggering 55.7 per cent to Rs 1,766 billion in Q4FY20, up from Rs 1,134 billion last year, underlining the stress in state government finances this year.
  • About 25 % rise in borrowing this fiscal: If market borrowings in the fourth quarter are in line with the amounts indicated, total gross borrowing this fiscal year would rise by 24.6 per cent to nearly Rs 6 trillion, up from Rs 4.8 trillion last year.
  • Net borrowing by states as large as Central govt. borrowing: Net borrowings by states would rise by an even sharper 28.3 per cent to Rs 4.6 trillion this year, becoming nearly as large as the Central government’s net market borrowings of Rs 4.7 trillion that have been announced so far for this year.


The figure and the trends indicated the financial risk the states are staring at. The government must take measure to revive the economy in order to address the problems faced by the states and ensure that the states are not left in lurch while SGT compensation receipts get delayed.



Government Budgets

[op-ed snap] Budgeting for jobs, skilling and economic revival


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Suggestions for revival of the Indian economy, unemployment in rural and urban areas and ways to increase it by investing in various sectors.


With the unemployment rate at 6.1 (2017-18), not just the future of the economy, the future of the country’s youth depends on the Budget.

Unemployment and other indicators of the economy

  • Unemployment in urban youth: The unemployment rate for urban youth in the 15-29 years category is alarmingly high at 22.5%.
    • These figures, however, are just one of the many problems, as pointed out by the Periodic Labour Force Survey.
  • The decline in labour force participation: The Labour Force Participation Rate has come down to 46.5% for the ‘15 years and above’ age category.
    • It is down to 37.7% for the urban youth. Even among those employed, a large fraction gets low wages and are stuck with ‘employment poverty’.
  • The decline in investment: The aggregate investment stands at less than 30% of the GDP, a rate much lower than the 15-year average of 35%.
  • The decline in capacity utilisation: The capacity utilisation in the private sector is down to 70%-75%.

Where the Budget should focus to reduce rural employment?

  • Revive demand: The Budget should also focus on reviving demand to promote growth and employment.
    • PM-KISAN and MGNREGA: Schemes like PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are good instruments to boost rural demand.
    • Unutilised fund: a significant proportion of the budgetary allocation for PM-KISAN will go unutilised.
  • Why income transfers through such schemes matter?
    • Spend most of their income: Farmers and landless labourers spend most of their income. This means that income transfers to such groups will immediately increase demand.
    • Consumes a wide range of goods: Further, rural India consumes a wide range of goods and services; so, if allocation and disbursement are raised significantly, most sectors of the economy will benefit.
    • Immediate result: And such transfer will have the immediate payoff.
  • Allocate to irrigation and infrastructure projects
    • How allocation could matter: Rural unemployment can be reduced by raising budgetary allocation for irrigation projects and rural infrastructures like roads, cold storage and logistical chains.
    • These facilities, along with a comprehensive crop insurance scheme, can drastically increase agricultural productivity and farmers’ income.
    • The decrease in wastage and reduction in inflation shocks: Moreover, by integrating farms with mandis, such investments will reduce wastage of fruits and vegetables, thereby leading to a decrease in the frequency of inflationary shocks and their impact.

Where the Budget should focus to reduce urban unemployment?

  • Focus on construction and related activities: In urban areas, construction and related activities are a source of employment for more than five crore people.
    • Second only to agriculture: Across the country, the sector’s employment figures are second only to those of the agriculture sector.
    • Construction as the backbone of other sectors:  These projects, along with infrastructure, support 200-odd sectors, including core sectors like cement and steel.
  • Problems with the construction sector:
    • Construction sector at a halt due to legal disputes: Due to the crisis in the real estate and infrastructure sectors, construction activities have come to a grinding halt.
    • At present, many real-estate projects are caught up in legal disputes-between home-buyers and developers; between lenders and developers; and between developers and law enforcement agencies like the Enforcement Directorate.
    • Unsold inventories: The sector has an unsold inventory of homes, worth several lakh crores.
    • Multiple authority as regulator and problem in liquidation: Multiple authorities -the Real Estate Regulatory Authority (RERA); the National Company Law Tribunal (NCLT); and the many consumer courts -have jurisdiction over disputes.
    • Consequently, restructuring and liquidation of bad projects are very difficult, and in turn, is the main source of the problem of NPA faced by the NBFCs.
  • What should be done to increase the demand in the construction sector?
    • Raise the tax exemption limit: To revive demand for housing, the Budget can raise the limit for availing tax exemption on home loans.
    • Use the bailout fund: The ₹25,000-crore fund set up by the centre to bailout 1,600 housing projects should be put to use immediately.
    • The funds should be used to salvage all projects that are 80% complete and not under the liquidation process under the NCLT.
    • Single adjudication authority: Several additional measures can also help. For example, there should be a single adjudication authority.
    • NIP and its significance: The ₹102-lakh-crore National Infrastructure Pipeline (NIP) programme is a welcome step. If implemented successfully, it will boost the infrastructure investment over the next five years by 2%-2.5% of the GDP annually.

Problems with National Infrastructure Pipeline

  • Problems of 60% investment: The problem is that more than 60% of the planned investment is expected from the private sector and the States.
    • Regulatory certainty a must for the private sector: The government does not seem to realise that for private investment, regulatory certainty is as important as the cost of capital.
    • Regulatory hurdles: Many infrastructure projects are languishing due to regulatory hurdles and contractual disputes between construction companies and government departments.
    • The reason behind the non-availability of private capital: As a result of the regulatory hurdles infrastructure investment has come to be perceived as very risky.
    • This is the major reason behind the non-availability of private capital for infrastructure.
  • Role to be played by the Centre: This is a scenario, where the private sector has very little appetite for risky investments and State finances are shaky due to low GST collection.
    • Responsibility of the Centre: The onus is on the Centre to ensure that the programme does not come a cropper. The budgetary support to infrastructure will have to be much more than the NIP projection at 11% of the GDP.

Way forward to revive the economy

  • Focus on completing the incomplete projects:
    • Bidding a lengthy process: Bidding and contracting for new roads, highways, railway tracks and urban development projects is a lengthy process.
    • This is also the reason why several infrastructure-linked Ministries like those for civil aviation and roads have not been able to spend money allocated to them in the current fiscal year.
    • Completing the projects a priority: Therefore, rather than earmarking budgetary support for new projects, the focus should be on projects that are currently under implementation so as to complete them as soon as possible.
    • Funding should be front-loaded: That is, funding should be front-loaded. In addition to creating employment, timely completion of infrastructure projects will help increase the competitiveness of the economy.
  • Address the distress in SMEs: The distress among Small and Medium Enterprises (SMEs) is another area of concern.
    • GST anomaly and stuck money: For many products produced by these enterprises, the GST rates are higher for inputs than the final goods. Due to this anomaly, around ₹20,000 crore gets stuck with the government annually in the form of input tax credits.
    • This has increased cost of doing business for SMEs, which employ over 11 crore people.
  • Fill the vacancies in the Government jobs: According to some estimates, there are more than 22 lakh vacancies in various government departments.
    • Focus on vocational training program: The government needs to provide affordable and good quality vocational training programmes.
    • To stop the demographic dividend from becoming a national burden, there is a need to invest heavily in skilling of the youth.
    • Besides, the Budget should give tax incentives to companies and industrial units to encourage them to provide internships and on-site vocational training opportunities.


Government Budgets

[op-ed snap] An independent fiscal watchdog for Parliament


From UPSC perspective, the following things are important :

Prelims level : Parliamentary Budget Offices

Mains level : Utility of such PBO for Indian parliamentarians

Monitoring money flow

  • When most people arrive at the ballot box, they vote with their gut.
  • But getting there requires absorbing and shaping months and years of conversations, long-held opinions and ideally, hard facts and evidence.
  • What is then important for our electorate and the representatives we vote for is that they have an independent, non-partisan source for these hard facts and evidence.
  • This is particularly important for our Parliament, which controls where and how money flows into our government and our country.

Need for expertise

  • The money flow needs to be not based on political allegiance or expediency, but on its expertise in budgetary, fiscal and economic matters.
  • Regardless of a majority or minority government, this body serves parliamentarians equally and without prejudice.
  • Even in a majority government, besides few expertises from the civil service, most parliamentarians do not benefit from timely access to good quality analysis on economic, fiscal or financial matters.

The Parliamentary Budget Offices

  • The body exists in many countries around the world, going by many names but most commonly as Parliamentary Budget Offices (PBOs).
  • These bodies help shape the debate and discourse around the state of the nation’s finances and the fiscal implications of significant proposals.
  • The work done by PBOs naturally ends up in the public sphere; when they do, they help drive smarter, more focused debate in the media and with our electorate.

Learning from examples: Defence costing

  • Take an example: the Rafale deal. Part of the controversy resulted from uncertainty regarding the true lifecycle costs of the aircraft bought.
  • In 2011, the Canadian PBO released a cost estimate for purchase of F-35 jets. This estimate far exceeded the one presented by defense analyst.
  • Defence costing, typically the purview of the Defence Ministry, was a completely new area of analysis, information and research that parliamentarians could now access to hold the government to account.

What PBOs provide

  • Besides costing policies and programmes, PBOs provide significant and sometimes the sole source of information on fiscal and economic projections.
  • The role of such an office does not always mean challenging the government; it is often the case that economic and fiscal projections of a PBO and the Ministry of Finance are similar.
  • This is unsurprising as data sources and economic methodologies for such projections are well established and uniform.
  • However, without the existence of another data point, generated by an independent, non-partisan office, it is difficult for parliamentarians to ensure that these projections and estimates continue to be reliable enough for them to make decisions on.
  • When these projections come into question, the Cabinet can tap the civil service for further research and analysis.
  • Most parliamentarians do not have this luxury and may have to rely on poor quality third-party data and analysis, done without relevant expertise. This is a situation that must be avoided.

Co-existing with the AG

  • A question — and a reasonable one — that often arises is the necessity of such an office when we already have an auditor general.
  • However, this misunderstands the role the auditor general performs, which is to provide retrospective audits and analysis of the financial accounts and performance of government operations.
  • These audits are often focused on the day-to-day goings on of government, and often hone in on the performance of the civil service.
  • A PBO provides prospective, forward-looking economic and fiscal projections, as well as policy costings.
  • This distinguishes it from an auditor general, which provides useful information, but only after the fact.

Global examples

  • Internationally, similar offices have been established across the world, with the most prominent being the Congressional Budget Office in the US which provides impartial advice to both upper and lower houses of the legislature.
  • Offices in the Netherlands, Korea, Australia and the UK have also been established for varying lengths of time. PBOs are also making an appearance in emerging economies in Sub-Saharan Africa and Southeast Asia.
  • In some countries, including Australia and most recently, Canada, PBOs have been playing the unique role of costing electoral platforms during an election campaign.
  • In this period, PBOs provide independent cost estimates of electoral platform measures to political parties.

India needs such office

  • A PBO, or a similar independent fiscal institution, will not solve all these problems but is a relatively cost-efficient way to arrive at a solution.
  • As the process toward the Union Budget 2020 has already kicked off, it would be prudent for parliamentarians to examine the case for a PBO more deeply.
  • The amount of information parliamentarians need to scrutinise in Budget documents has exponentially increased and a PBO would assist parliamentarians in this process of scrutiny.
  • Legislatures across the world have witnessed an increasingly stronger executive try to wrest away its rightful power of the purse.
  • A PBO would help resuscitate these powers that have fallen into disuse.

Way forward

  • What distinguishes India’s democracy, besides its diversity of views and opinions, is its ability to evolve and remain dynamic.
  • What is gravely in danger is evidence-based discussion around important policies that affect the trajectory of our Republic, discussions which can quickly blur the line between fact and fiction.
  • This is why India’s Parliament and government need to work quickly and energetically to establish such an office; it is in everyone’s interests to do so.

Government Budgets

[op-ed snap] Allocations are key


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : What are the priority areas in economy now

The budget must focus on the priority areas for the budget allocations. It is expected to provide funds and an assurance that the allocations would be rule-based.

  1. Rural distress needs to be allocated to funds.
    1. Drinking water
    2. Improving the efficiency of existing irrigation systems
    3. Rural finance — including temporary waiver of loan repayments — 
  2. Job creation
    1. It will depend on the revival of industrial production, continuing growth of exports and an agricultural revival. 
    2. Most policies have a lag of around four to six months.
    3. In the short run, the money will be needed for the MGNREGA. 
    4. The budget should concretely raise public investment to revive private investment to reverse the declining growth rate in every quarter.
  3. Fiscal Deficit
    1. The fiscal deficit is a real issue and leads to pressures on the bank rate and exchange rates. 
    2. The need is to raise resources by taxation and not cutting consumption by the government and non-government sectors. 
  4. Banking sector
    1. The cleanup of the banking and NBFC sectors should be immediate and it needs funds.
    2. Though these are outside the budget, they determine the fiscal deficit.
  5. Raise government investment at the central, state and parastatal level.
  6. The economy is suffering from a decline in investment ratios. This is reflected in the declining growth rate, which is below the potential of 8%. 
  7. The last round of the NSS data shows that girl child dropped out of school more than earlier. If she goes to college, marries late, the first child comes later the real demographic dividend starts.

Case study and way ahead

  1. Gujarat’s experience shows that a high manufacturing physical output growth rate reduces the workforce dependent on agriculture.
  2. The allocation for Self Help Groups with a trust fund is a clear solution.

Government Budgets

[op-ed snap] Borrow abroad and profit


From UPSC perspective, the following things are important :

Prelims level : Government Debt and its composition

Mains level : Public debt and related issues


The government is planning to issue 10 year bonds denominated in foreign currency.

Why it is a good idea

  1. Such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates.
  2. Our debt to GDP ratio is not very high, the exchange rate is stable, and foreign exchange reserves are high. So foreign borrowing, if its long term, is not a problem.
  3. If foreign bond issuance was accompanied by a move towards greater capital account convertibility then it may be worth pursuing.
  4. A country pays a country premium for borrowing in dollars; currently, the US 10-year bond is trading at 2%. A complex set of factors determine the country’s premium, but the magnitude of reserves and foreign currency debt are important attributes. India has less debt denominated in foreign currency, close to 5%. Thus, we should be able to borrow at a somewhat lower premium than 150 bp, possibly 130bp.
  5. Indian inflation has moved structurally downward over the last three years.
  6. It will also help to significantly lower the real repo rate to respectable levels. 

Problems with these bonds

  1. Usually, the lower dollar interest rate is offset in the long run by higher principal repayments as the rupee depreciates against the dollar.
  2. Loss of sovereignty and may lead to currency depreciation

No country has grown at “trend” rates with a real repo rate of around 3.4%, not even 2.4% or 2%. Issuing bonds now is an idea whose time has come.

Government Budgets

Fiscal Performance Index by CII


From UPSC perspective, the following things are important :

Prelims level : CII, FPI

Mains level : FRBM

  • Confederation of Indian Industry (CII) has come out with a ‘Fiscal Performance Index’ to assess quality of budgets presented by the Centre and state governments.

Fiscal Performance Index (FPI)

  • The composite FPI developed by CII is an innovative tool using multiple indicators to examine quality of Budgets at the Central and State levels.
  • The index has been constructed using UNDP’s Human Development Index methodology which comprises six components for holistic assessment of the quality of government budgets.

Why need such an index?

  • A single criterion such as the ‘fiscal deficit to GDP ratio’ does not tell us anything about the quality of the Budget.
  • Hence, the Government should use multiple indicators to measure the quality of Budgets at the Central and the State levels rather than a single indicator.

Components of FPI

  1. Quality of revenue expenditure: measured by the share of revenue expenditure other than interest payments, subsidies, pensions and defence in GDP
  2. Quality of capital expenditure: measured by share of capital expenditure (other than defence) in GDP
  3. Quality of revenue: ratio of net tax revenue to GDP (own tax revenue in case of States)
  4. Degree of fiscal prudence I: fiscal deficit to GDP
  5. Degree of fiscal prudence II: revenue deficit to GDP and
  6. Debt index: Change in debt and guarantees to GDP

Other measures of FPI

  • As per the new index, expenditure on infrastructure, education, healthcare and other social sectors can be considered beneficial for economic growth.
  • At the same time, tax revenues are sustainable sources of revenue for the government as compared to one-time income sources.

Government Budgets

[op-ed snap] Realising grand objectives


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Issues which need immediate attention for India's safety and growth.


While the broad directions of India’s foreign relations — with the neighbourhood, Afghanistan, the U.S., China, Indo-Pacific, Russia, and Europe — have been set over the past several years, the main factors inhibiting India’s performance are ultimately domestic in nature. Three stand out.

1. Trade

  • The first is trade.
  • It often surprises people that India’s trade-to-GDP ratio is higher than China’s or the U.S.’s. India’s market, and access to it, remains a valuable lever with other countries.
  • But much of India’s commerce involves raw materials and low value-added goods, and is still insufficiently integrated into global supply chains.
  • With global trade stagnant and the World Trade Organization at a standstill, the only way for India to seize a larger share of exports is through well-negotiated preferential trade agreements.
  • India’s past record in this department has been poor, leaving some sectors exposed to dumping and others unnecessarily cloistered.
  • A smarter trade agenda will not only create jobs and drive reforms at home, it could become a potent strategic tool in international affairs.

2. Defence

  • The second concerns defence.
  • India has the world’s fifth largest defence budget but is also the world’s second largest arms importer.
  • Not only does this compromise national security, it means that India cannot offer an alternative as a defence supplier to countries in its region.
  • Defence indigenisation will require financing for defence capital expenditure; assessments of costs, technology transfer capabilities, and export potential early in the procurement process; and fair competition between the Indian private and public sectors.

3. Overseas Project Implementation

  • The third concerns overseas project implementation.
  • India’s outgoing aid budget has been relatively flat, reflecting a scepticism of grant aid from India’s own experience as a recipient.
  • Instead, it has now started to explore other financing options. Indian overseas credit has increased significantly, with over $24 billion extended primarily to South Asia, Southeast Asia, and Africa.
  • But building on several recent steps will significantly increase the country’s delivery and regional credibility.
  • These include better project planning, more attractive and competitive financing terms, more reliable disbursal of funds, and enhanced coordination and communication with the private sector for implementation.


Many regional policy challenges would be addressed with these three major fixes. None will be easy as they will require tackling vested interests. While the first Modi government made its strategic objectives known and set out a clear direction, key policy interventions in these three areas will now be necessary for India to realise its grander objectives.

Government Budgets

[op-ed snap] Redactive pricing audit and the CAG’s duties


From UPSC perspective, the following things are important :

Prelims level : CAG

Mains level : Redactive Pricing approach in CAG's Report harm transparency in democratic institutions.


The Supreme Court’s observations in connection with the Rafale fighter aircraft deal by citing the Comptroller and Auditor General of India’s (CAG’s) report on redacted pricing, and subsequent media reports and the controversy over “stolen files” brought back into the spotlight the role of the supreme audit institution of India.

Questions surrounding the report

  • What is redactive pricing?
  • Does the constitutional mandate provide redactive pricing to be included in the CAG’s audit reports submitted to the President to be placed before Parliament?
  • Do any supreme audit institutions (SAIs) such as the National Audit Office, the Government Accountability Office or Commonwealth countries follow redactive pricing in audit reports?


Redaction is the selection or adaption by ‘obscuring or removing sensitive information’ from a document prior to publication.

Duties of CAG

  • The CAG is mandated to audit all receipts and expenditures of the three-tier governments in India and report to the legislature judiciously, independently, objectively in compliance with applicable laws, rules and regulations, without fear and favour.
  • He conducts financial compliance and performance audits and submits his reports to the legislature to help people’s representatives in enforcing legislative oversight and public accountability of the executive.
  • Legislative committees such as the Public Accounts Committee and Committee on Public Undertakings examine the CAG’s selected reports.

Explanations regarding redactive Pricing

  • In the preface of the audit report, the CAG stated that redactive pricing was unprecedented but had to be accepted due to the Ministry’s insistence citing security concerns.
  • Consequently, the full commercial details were withheld and the figures on the procurement deal were blackened.

Not Transparent measure

  • It was unprecedented that an audit report submitted by the CAG to the President under Article 151 of the Constitution suppressed relevant information.
  • Whether the Ministry’s insistence citing security concerns could have been accepted by the CAG can be examined only by the Supreme Court in the light of the constitutional provisions on the CAG’s duties and parliamentary privileges and prerogatives.
  • Redactive pricing is nowhere used in SAI audit reports.
  • It does not seem to have been used in a government audit by any SAI of any country.
  • Redactive pricing in the ‘Performance Audit Report of the Comptroller and Auditor General of India on Capital Acquisition in Indian Air Force (Union Government – Defence Services, Air Force, Report No. 3 of 2019)’ suppresses more than it reveals.
  • For example, in the Rafale deal, Parliament, its committees, the media and other stakeholders of the CAG’s reports cannot obtain complete, accurate and reliable information due to redactive pricing.
  • The reduction in the original requirement, to 36 aircraft, a waiver of the earlier decision to involve Hindustan Aeronautics Limited, observations of the Indian Negotiating Team, cost escalation due to inclusion of bank guarantee and performance guarantee were not compared properly to arrive at the audit conclusion.

Pricing is Pivotal to procurement

  • Pricing is an integral part of the procurement decision-making process of any equipment, product, goods or service.
  • Therefore, price integrity and comparative competitiveness are at the heart of any procurement decision.

Way Forward

  • Given the dynamics of international competition in competitive products and pricing in today’s modern market scenario, pricing, delivery and post-delivery service and other conditions are essentially covered in an SAI audit.
  • It is a complex audit, demanding exceptional insight, expertise, knowledge and skills.
  • Seek expertise – In case the CAG’s office lacks expertise to conduct a performance audit, expertise can be sought from the pool of resources or credible organisations to be coopted in the audit team.
  • No resorting to redactive Pricing – Pricing decisions must be subjected to detailed analysis, without resorting to redactive pricing.
  • The privilege of Parliament – Parliament is constitutionally privileged to know what the executive had done and how and under what conditions a procurement was decided. The CAG’s audit is expected to highlight value for money in purchase decisions.


A performance audit is done to establish whether the procurement activity was executed keeping in mind economy, efficiency, effectiveness, ethics and equity. Only a thorough pricing audit can bring out the credibility and integrity of a purchase decision, thereby achieving an SAI’s constitutionally mandated responsibilities.

Government Budgets

[op-ed snap] Managing the stimulus


Mains Paper 2: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Government Budgeting.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the highlights of the budget 2019.

Mains level: The news-card analyses the income transfer scheme introduced in budget 2019 and its impact over the economy, in a brief manner.


  • According to Budget 2019, the decline in fiscal deficit ratios has stalled and at nearly 6 per cent, India continues to have one of the highest general government (states plus Centre) deficits globally.

Crowding out, leaving more for the private sector

  • A measure of “crowding out” is government borrowing from bond markets as a share of incremental deposits in the banking system.
  • This ratio is now down to 33 per cent as the net bond issuance budgeted for the next financial year is unchanged from levels seen eight years back, a period in which the economy has grown substantially.
  • That is, the government’s excess spending, funded through borrowings, is now appropriating a smaller part of the financial savings and leaving more for the private sector.

Not all a rosy picture

  • In the current financial year, extra-budgetary spending was Rs 1.4 trillion higher than what had been budgeted.
  • Ninety per cent of that amount was from the Food Corporation of India.
  • While higher inventory holding likely explains a large part of this Rs 1.2 trillion increase, one wonders if some unfunded food subsidy may have contributed too.
  • Governments also have this tendency to give aggressive tax collection targets that make the deficit appear low, but then later in the year are forced to make course corrections.

Are the tax targets for the next year too aggressive?

  • They appear to be somewhat stretched but achievable.
  • The economic growth estimate of 11.5 per cent, taking the GDP to Rs 210 trillion, may be slightly optimistic, given how weak inflation has been in the past several months, even if the government’s consumption stimulus shores up activity levels.
  • Budgeted growth in direct tax collections at 15 per cent appears high, but is lower than what has been achieved over the past two years and thus more credible, given the significant widening of the tax base, and some recovery in corporate earnings.

Estimated growth for GST

  • The 18 per cent estimated growth for GST collections seems to assume an improvement in compliance.
  • According to the government, GST collections thus far have been nearly completely voluntary.
  • There has been very little enforcement and follow-up.
  • Post elections, the government may re-start the move towards e-way bill or invoice-matching, and also permit tax officials to question the accuracy of the self-assessments made by entities.

Income transfer scheme for farmers

  • The highlight of the budget was the Rs 750 billion income transfer scheme for farmers.
  • Even though this was widely anticipated, this is a policy innovation whose impact is hard to model.
  • Most income transfer schemes so far have been experiments on small sets of people in particular villages or townships.
  • The impact of a scheme with 117 million farmland owners is likely to be significantly different.


  • How will the recipients use these transfers?
  • Will some microfinance companies create loan products where these payments become the instalments, and the recipient gets Rs 25,000 upfront instead of Rs 2,000 thrice a year?
  • Will these funds be used to repay existing loans from money lenders?
  • Will these funds be used to buy Rs 500 of better food every month, send the kids to a private school, invest in sowing the next crop, or used to buy a bicycle?
  • Will they save all or part of it?
  • Each of these choices will very likely be made by some individuals, but the collective impact would depend on how many chose to do what.

Will the income transfer scheme for farmers be inflationary?

  • Theoretically, a sudden rise in demand where supply takes time to respond should create inflation.
  • If for argument’s sake, everyone used these funds to send children to private schools, there could be a shortage of schools and teachers and the price of schooling would rise.
  • But this risk is low: At about a third of a per cent point of GDP, this is small.
  • The diffused nature of this transfer (a small sum to a large number of people), makes it unlikely to cause a demand surge for any particular good or service.
  • Rs 6,000 per year may mean a 30 per cent addition to some households’ income, and 5 per cent to others: This would show up in how they spend these funds as well.
  • If this had been structured as a monthly income scheme, with double the transfer per recipient for half as many beneficiaries, the impact on inflation may have been higher.

Scheme would boost food demand and growth

  • Such a scheme would have most likely boosted food demand: This is nearly 60 per cent of the consumption basket of the target population.
  • If you have ever asked how a country with one of the lowest milk consumption per capita can have an oversupply of milk for several years, the answer is that milk at current prices is unaffordable to many.
  • If the demand for milk, meat, fruits and vegetables, that is, more expensive calories, was boosted, the stalled channel of income transfer from the rich to the poor, which is food prices, would have restarted.
  • This stimulus should boost growth, which has been fading rapidly in the last several months.


  • An income transfer scheme was somewhat inevitable, and such a scheme will likely continue for many years.
  • After a certain stage of economic development, it becomes difficult for average per-capita agricultural incomes to keep pace with the rest of the economy, as land productivity becomes a limiting factor.
  • Moving workers away from agriculture is the only sustainable solution: In the interim, such schemes can provide temporary relief.
  • But given how little we understand about its potential impact, policy-makers need to be agile in making design changes to maximise the gains without having damaging side-effects.

Government Budgets

[op-ed snap] Socio-economic issues focus area of Budget 2019


Mains Paper 2: Economic Development| Government Budgeting.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of Budget 2019.

Mains level: The news-card analyses the major focus areas of Budget 2019, in a brief manner.


  • Budget 2019 seems to be a budget for the masses as the government has announced several relief measures for farmers, informal workers and other marginalized communities.

Farmers’ and informal workers’ benefit programmes

  • To relieve farmer distress the budget unveiled the Pradhan Mantri Kisan Samman Nidhi, an assured income support programme, for 120 million small and marginalized farmers with an outlay of ₹75,000 crore per year.
  • This is a good move, however, with an annual relief of only ₹6,000 per year, it may not make any meaningful impact.
  • The extension of 2% interest subvention to animal husbandry and fisheries farmers, using Kisan Credit Card for loan, will be beneficial.
  • Similarly, the extension of 2% interest subvention for the full loan term to farmers seeking loan rescheduling on account of natural calamities, will ease pressure faced by them.
  • In case of timely repayment, they will get an additional 3% incentive for the entire period of reschedulement of loans.

Unorganized sector

  • The Pradhan Mantri Shram Yogi Maandhan pension scheme for unorganized sector workers with an income of up to ₹15,000 is a welcome move, as it will offer them a monthly pension of ₹3,000 with a nominal per month payout.
  • This is a good initiative, as it will bring 100 million such workers and labourers under a social security net, and will also be the first step towards generating formal data on the kind of jobs being created in this sector.

Social schemes

  • The allocation for the welfare of Scheduled Castes and Scheduled Tribes has been substantially increased, which will help in improving the condition of these marginalized communities.
  • The allocation of ₹60,000 crore for Mahatma Gandhi National Rural Employment Guarantee Act for the economically weaker sections of society will also bring some relief.


  • In the area of education, the budget allocation for the National Education Mission has gone up.
  • The government has announced approximately 200,000 extra seats in educational institutions to ensure availability for various reserved classes.
  • This should help in creating equitable educational opportunities.
  • Similarly, the additional allocation for the Integrated Child Development Scheme will provide better preschool education and primary healthcare, as well as improve nutrition in young children and their mothers.

Focus on women

  • The allocation of ₹1,330 crore for the Mission for Protection and Empowerment for Women is timely and will help in creating a safe and secure environment for women.
  • It is encouraging to note that over 70% of the beneficiaries of the Pradhan Mantri Mudra Yojana are women, who are engaged in creating their own businesses.
  • Under the Pradhan Mantri Ujjwala Yojana, 60 million liquefied petroleum gas connections have been provided to rural women, thus improving their quality of life.


  • The allocation of ₹19,000 crore for the Pradhan Mantri Gram Sadak Yojana will improve rural connectivity.
  • While the government claims that India is the fastest highway developer in the world with 27km of highways built each day, road infrastructure in urban cities needs immediate attention.
  • The use of inland waterways for freight movement is a good beginning and, with adequate allocation, it could provide an effective alternative to the surface transport system in the country.

Digital India push

  • This area have certainly seen some progress.
  • The government’s plans to create 100,000 digital villages over the next five years will give impetus to the Digital India programme.
  • The announcement of a national programme on artificial intelligence, which is based on NITI Aayog’s research work over the past one year, is a welcome move.
  • Such an initiative will go a long way in addressing the skills gap in this area.


  • However, the biggest disappointment has been the absence of any meaningful incentive given to the healthcare sector to enable the government’s agenda of making healthcare affordable and accessible.
  • The government should have looked at goods and services tax exemption on cancer and diabetes drugs, which would have benefited millions of patients.


  • Therefore, though socio-economic issues has been the major focus area of Budget 2019, the absence of any incentive for healthcare sector has been a major disappointment.

Government Budgets

Explained: Interim Budget


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Interim Budget

Mains level:  Difference between normal and interim budget


  • Union finance ministry is all set to discuss its interim budget ahead of the general elections.

Lets have a look over what is:

Interim Budget

  1. The budget for the year approved by Parliament gives the government spending rights only till the end of the financial year ending March 31.
  2. If for any reason the government is not able to present a full budget before the financial year ends, it will need parliamentary authority for incurring expenditure in the new fiscal year until a full Budget is presented.
  3. Through the interim Budget, Parliament passes a vote-on-account that allows the government to meet the expenses of the administration until the new Parliament considers and passes the Budget for the whole year.

Vote on Account

  1. Through the interim Budget, Parliament passes a vote-on-account that allows the government to meet the expenses of the administration until the new Parliament is elected.
  2. It is a grant in advance to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill.
  3. This enables the government to fund its expenses for a short period of time or until a full-budget is passed.
  4. Normally, the Vote on Account is taken for two months only.
  5. The sum of the grant would be equivalent to one sixth of the estimated expenditure for the entire year under various demands for grants.
  6. As a convention, a vote-on-account is treated as a formal matter and passed by Lok Sabha without discussion.

How does the interim budget differ from a regular budget?

  1. In an interim Budget, the vote-on-account seeks parliament’s nod for incurring expenditure for part of a fiscal year.
  2. However, the estimates are presented for the entire year, as is the case with the regular Budget.
  3. The incoming government has full freedom to change the estimates completely when the final Budget is presented.

Can the government levy new taxes and propose new policies?

  1. Constitutionally, the government can make tax changes in the interim budget.
  2. However, the 12 interim budgets since Independence have respected the fact that the government is a custodian for a few months and have refrained from announcing big-ticket changes or new schemes.


  1. The government cannot present a full budget because in such a short session, there’s no time to debate proposals in Parliament.
  2. Expenditure for new schemes will have to form part of the new budget, which can be approved only after April 1.
  3. The newly formed government cannot be burdened by the previous government’s budgetary allocations.
  4. While these are the technicalities, many look upon the vote on account as election rhetoric.
  5. Many look at it as a window where the government highlights its achievements ahead of elections.

Government Budgets

Explained: Off-Budget Financing


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, Off-Budget financing, FRBM Act,

Mains level:  Deficit Financing Mechanisms


What’s the issue?

  1. The Comptroller and Auditor General (CAG) of India has pulled up the government for increased use of off-budget financing for schemes and subsidies in its Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act report for FY17.
  2. This practice of off- budgeting masks the true extent of fiscal and revenue deficits.
  3. The CAG of India recommended that the government to institute a policy framework for off-budget financing, which, should include a disclosure about its rationale and objective to parliament.

Why in news?

  1. In terms of revenue spending, off-budget financing was used for covering the fertilizer bills through special banking arrangements; food subsidy bills of the Food Corporation of India through borrowings.
  2. And for implementation Accelerated Irrigation Benefits Programme, govt. borrowed from the NABARD under the Long Term Irrigation Fund.
  3. Such off-budget financing are not part of calculation of the fiscal indicators despite fiscal implications.

Explained: Off-Budget Financing

  1. This refers to expenditure that’s not funded through the budget.
  2. For example, the government sets up a special purpose vehicle (SPV) to construct a bridge.
  3. The SPV will likely borrow money to build the bridge on the strength of a government guarantee.
  4. If it’s not a toll bridge, the SPV will need government support to meet interest obligations.

Why is it Problematic?

  1. Even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.
  2. Since it’s not, this doesn’t reflect on the fiscal deficit number as well.
  3. Governments across the world use this to escape budget controls.

Implications of Off-budget financing

  1. Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
  2. But the cost is borne by the budget through some mechanism or the other.
  3. Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
  4. In the above example, the borrowing by the SPV should ideally be included in the government’s debt.
  5. To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.
  6. Hence, Parliamentary control on such spending is also reduced as its remains outside the budget.

CAG favors a Policy for Disclosure

  1. In order to address these issues, CAG said the government should consider putting in place a policy framework for off-budget financing.
  2. The framework should specify the rationale and objective of off-budget financing, quantum of off-budget financing and sources of fund, among others.
  3. CAG further said the government should also consider disclosing the details of off- budget borrowings through disclosure statements in Budget as well as in accounts.


Fiscal Responsibility and Budget Management (FRBM) Act

  1. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government
  2. FRBM became an Act in 2003 which provides a legal-institutional framework for fiscal consolidation.
  3. The rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government.
  4. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09.
  5. It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of a breach.
  6. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.
  7. The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
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