Contents
- 1 What is the dilemma the government is facing?
- 2 How did the budget support growth while consolidating the deficit?
- 3 The debate of income support versus capital expenditure tradeoff
- 4 How does the budget facilitate the creation of fiscal buffers?
- 5 What should be done to facilitate near-term growth and simultaneously preserve medium-term stability?
News: The government has followed a capital expenditure strategy in the recent budget, but there are certain questions associated with the government’s strategy.
What is the dilemma the government is facing?
On the one hand, the economy still needs fiscal support to drive growth and employment. On the other hand, the global backdrop has become much more risky. For instance, the Fed is set to deliver a series of rate hikes in 2022 (already spilling over into Indian bond yields) and crude prices are close to $90. In addition, public debt/GDP has climbed towards 90% and the current account deficit has widened past 2% of GDP.
| Must read: Explained: Significance of US Federal Reserves rate cut and its impact on India |
How did the budget support growth while consolidating the deficit?
The Budget pegs this year’s deficit at 6. 9% of GDP. If Govt introduced more growth, the fiscal deficit will widen. But this is not the case because
– The Government introduced a fiscal impulse of up to 3. 1% of GDP last year. But this year the government has planned to withdraw subsidies up to 1.6% this year.
– The government has automatic stabilisers in the form of higher-than-expected direct tax collections.
Hence, the Fiscal consolidation in FY 2023 will be more modest at 0.2% of GDP, due to with drawl of significant stimulus packages.
The debate of income support versus capital expenditure tradeoff
Components of demand (private consumption and investment) will take time to recover, some sectors got severely hit because of the pandemic. Only a perceived increase in permanent income (ie a job) can induce households to spend. Introducing employment is therefore absolutely key to livelihoods and future consumption prospects. So, the capital expenditure will provide the required benefits.
| Must Read: What is the core strategy adopted by the Union Budget 2022-23? |
How does the budget facilitate the creation of fiscal buffers?
Every budget will focus on creating a buffer against global and domestic shocks, either by ex-ante (before the shock) or by ex-post (after the shock).
In the present budget, the government decided to work on ex ante. This is done by conservative tax accounting for next year. According to the budget, the Tax buoyancy is pegged at just 0. 4 next year vis-à-vis an expected outturn of 1. 8 this year. Hence, the tax collections are likely to exceed budgeted targets, with a buoyancy of 1 delivering an extra 0. 5% of GDP to the Centre.
This fiscal buffer will be used to deal with shocks. e.g. If oil surges, excise duties can be cut, if fertilizer prices remain high, its subsidy allocation can be increased.
| Read here: Union Budget 2022-23: Highlights and Concerns – Explained, pointwise |
What should be done to facilitate near-term growth and simultaneously preserve medium-term stability?
The long term stability has been managed by capital expenditure and job creation. To bring short term stability, the government has introduced various borrowing programmes. It is now the time for RBI to ramp up monetary policy parallelly to balance the fiscal policy of the government by normalising the inflation rates.
Source: This post is based on the article “4 Choices, No Free Lunch” published in Times of India on 4th January 2022.
Discover more from Free UPSC IAS Preparation Syllabus and Materials For Aspirants
Subscribe to get the latest posts sent to your email.
