Fiscal Compression, Jeopardised Recovery, the Humanitarian Crisis and Reforms

Formulated against the backdrop of an unprecedented economic contraction and the continuing pandemic, now in its second wave, the fiscal stance of the 2021–22 budget is surprisingly contractionary and insensitive to the humanitarian crisis. But the menu of reforms it has announced, barring retrograde changes in tariffs, could have a strong positive impact on long-term growth if effectively implemented along with a fiscal stimulus. This paper discusses the short-term impact of the budget on stalling recovery along with related debt dynamics and monetary policy issues. The weak response of the budget to the humanitarian crisis and possible long-term growth implications of the reform programme it has announced are also investigated.

We start with a few preliminary remarks. First, the greater transparency in the budget needs to be appreciated, parti­cularly with regard to the deficit. Since finance ministers are sensitive to the bad optics of large fiscal deficits, there has often been a tendency for the budget team to find ways of understating the size of the fiscal deficit, especially the recourse to off-budget borrowing. Analysts would have to compute the total public sector borrowing requirement (PSBR) to get a better sense of the fiscal stance in a budget. This problem had become acute in recent years, especially after the large food subsidy bill was shifted to the account of the Food Corporation of India (FCI), which financed the subsidy with loans from the National Small Savings Fund (NSSF). In her budgets, the finance minister has attempted to make the true size of the deficit more transparent by including statements specifying the extent of off-budget borrowing, and in this budget, she has brought the food subsidy back into the budget, including the outstanding liabilities of FCI to the NSSF on this account.