Rising fiscal deficit and Expenditure Need during Pandemic

Contents

• 1
• 2 Synopsis:
• 3 Background:
• 4 About Fiscal Deficit:
• 5 Rationale for raising government expenditure and deviating from FD target:
• 6 Way Forward:

Synopsis:

The pandemic time demands enhanced government expenditure to support the vulnerable masses and ensuring their survival. Considering this, the government should enhance the spending on physical and human capital formation without worrying about a rising fiscal deficit.

Background:

• The International Monetary Fund in its World Economic Outlook report had raised the growth forecast for Indian economy. The report expected growth of 11.5 – 12.5% in the financial year 2021-22.
• However, the country is now witnessing a second wave of Covid 19 that demands greater government support for the vulnerable masses. 
• Many experts believe that a deviation from fiscal targets and reduction in growth rate is justified under the extraordinary times like the pandemic.

About Fiscal Deficit:

• A fiscal deficit (FD) situation occurs when the government’s expenditure exceeds its income. It is the difference between the total expenditure of the government and its total revenue (excluding borrowings).
• It is estimated to moderate from 9.5 percent of GDP in FY21 to 6.8 percent of GDP in FY22. The estimation is based on an increase in revenue receipts by 15% and an increase in fiscal spending by 1% in the current fiscal year.

Rationale for raising government expenditure and deviating from FD target:

• Rising Unemployment: The second wave has resulted in imposition of lockdowns and curfews across multiple states. This has suspended economic activities leading to greater job losses.
  • In the previous lockdown of 2020, the unemployment rate increased by nearly 14.8 percentage points, rising to 23.5 per cent in Apr 2020.  
• Accomodative Monetary Policy: The policy is already accommodative and may not have enough room to further boost the economy. 
  • RBI reduced the repo rate by 115 basis points since 2020. The inflation level is rising in the economy which may deter it to reduce further interest rate.
  • Nonetheless, the RBI may raise interest rates if inflation levels breach the 6% upper band threshold.
• Providing a Safety Cushion: Extraordinary times demand greater support from the welfare state for its citizens. Further, stringent measures (like Lockdown) have made social security schemes (like MGNREGA) ineffective.
• Supporting the Health system: The pandemic has exposed the lacunae of our health system. Significant fiscal support is needed to provide free vaccinations to all. 
  • This is highly desired as the benefits of faster and wider vaccine coverage enormously outweighs its monetary cost.
• Global Scenario: Other countries are also providing significant fiscal stimulus to revive their economic growth as seen in the case of the U.S. 
  • The country has adopted an easy monetary policy combined with a huge fiscal stimulus to catalyze its economic growth to pre-pandemic levels.

Way Forward:

• The central government should:
  • Firstly, enhance the limit of promised food grains under the National Food Security Act. The government recently promised an additional five kg of grain to the 800 million beneficiaries under the Act.
  • Secondly, consider transferring cash to the bank accounts of the poor
  • Thirdly, reduce non-essential government expenditures and use them for COVID-related expenditure
• Further, it may raise additional funds through borrowings from the market. This may worsen FD in the short run but would generate additional growth that may make debt consolidation easier when things normalise.

Source: Indian Express