Fiscal management during a pandemic 

News: India’s actual growth performance for the fiscal years 2020-21 and 2021-22 was above the projections made by the Finance commission. Even for the fiscal year 2022-23, the economy is projected to grow at 11% (at current prices) compared to 9.5% projected by the Commission. 

What is the effect of this improved growth performance? 

Higher growth performance is also reflected in higher revenue mobilisation, thus creating fiscal space for higher spending. Govt has also introduced higher capital expenditure as a way to generate demand and employment in the economy.  

Why Government’s decision to improve allocation for capital expenditure is perfectly timed? 

It is very imperative that government makes capital investment in such uncertain times to achieve a strong and sustainable recovery from the pandemic, specially when private and household investments have been negatively affected by the pandemic. 

However, as two-thirds of the general government’s capital expenditure is undertaken by states, so the announcement of the Rs 1 lakh crore interest-free loans to the states to increase public investment has been a significant step. 

How this increased allocation to states will be helpful for the economy? 

Since in the year 2021-22, many states had reported revenue deficit in their accounts, this loan facility can prevent the risk of reduction in capital expenditure at the state level. 

Also, since it is meant for capital spending, it cannot be diverted to finance revenue deficit and thus has the potential to augment capital spending at the state level and thereby the overall capital spending in the country.   

Effective utilization of this facility to states will also be critical for higher public investment.  

What has been the scenario on the revenue side of the budget? 

Although there has been an increase in taxes in both the 2020-21 (the first year of the pandemic) and 2022-23, but revenue deficit continues to be more than 55% of the fiscal deficit. 

This needs to be kept in consideration while deciding for revenue expenditure, that is, interest payments and allocation under various centrally sponsored and central sector schemes.   

It is also important to consider central sector scheme (CSS) especially when it is contributing to the high revenue deficit of the central government and binding state resources for matching contribution, thereby increasing states’ deficit. 

What should be government’s stance on fiscal consolidation to ease this deficit? 

Although the fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission, but it still is on the decline. 

Government should focus on the direction of fiscal consolidation rather than a specific reduction, especially in an unprecedented time like these. 

Source: This post is based on the article “Fiscal management during a pandemic” published in Indian express on 4th Feb 2022.