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C Rangarajan, D K Srivastava write: A word of caution, though: With higher expenditure, financed through borrowings, the impact of liquidity expansion on inflation needs to be monitored.
Syllabus—GS3: Budget & Fiscal Policy related
The Real GDP:
- Recent NSO’s provisional estimates for 2020-21, show that the Indian economy witnessed an annual contraction of 7.3% in real GDP.
- And a real GDP growth of 7.8% would be required in 2021-22 to reach back to 2019-20 real GDP levels.
- The adverse impact of the 2nd wave of the pandemic is taken into account to re-examine the 2021-22 GDP growth.
- RBI has revised its 2021-22 real GDP growth forecast to 9.5%.
- Moody’s& Societe Generale projected the lower side of growth that is 7.6% & 8.5% respectively.
- If govt implements a suitable policy & lockdown wind-up by July, 9% real GDP growth is still feasible.
The Nominal GDP:
- It is equally important to consider nominal GDP growth for 2021-22 because it would be a critical determinant of fiscal prospects.
- Due to supply-side & cost-push pressures, the RBI has projected CPI inflation at 5.1% & the Implicit Price Deflator is 4%.
- Thus, the nominal GDP growth may be projected at 13.4% which is 1% lower than the Centre’s budget assumption of 14.4%.
Tax Revenue:
- According to Controller General of Accounts data for 2021-22., the center’s fiscal aggregates indicate a gross tax revenue (GTR) of Rs 20.2 lakh crore & net tax revenue of Rs 14.2 lakh crore.
- The growth in GTR for 2021-22 was derived by applying a buoyancy of 0.9.
- This gives for 2021-22, a tax revenue growth of 12% & the projected gross & net tax revenues would be Rs 22.7 lakh crore & Rs 15.8 lakh crore respectively.
- That is additional net tax revenue to the Centre amounting to Rs 0.35 lakh crore.
Non-Tax Revenue:
- The main shortfall is expected to be in non-tax revenue & non-debt capital receipts, their 2020-21levles are Rs 2.1 lakh crore & Rs 0.57 lakh crore respectively.
- An estimated growth rate of 15% of these will result in a Rs 1.3 lakh crore shortfall in 2021-22.
- During the last 5 years, the growth rates of non-tax revenues & non-debt capital receipts have been volatile but remained together averagely less than 15%.
- For 2021-22, the large budgeted growth in non-debt capital receipts seems unlikely due to the 2nd wave-induced challenges.
- With RBI’s recent announced dividend of Rs 0.99 lakh crore to the centre, the overall shortfall in total non-debt receipts is limited to 0.4% of estimated Nominal GDP.
- This indicates that slippage in the budgeted fiscal deficit of 6.7% of GDP could be a limited one.
The Economic Challenges:
- An increase in the provision for income support measures for the vulnerable rural & urban population.
- Which requires Rs 1 lakh crore that can be partly provided through expenditure restructuring.
- The decision to vaccination all would cost more than or double the budgeted expenditure of Rs 0.35 lakh crore.
- Additional expenditure for select sectors like healthcare costs another Rs 1 lakh crore.
- Together, these expenditures amount to Rs 1.7 lakh crore or 0.8% of the estimated nominal GDP.
- Thus centre needs to plan for a fiscal deficit of 7.9% GDP consisting of
- 7% budgeted FD,
- 4% Shortfall in total-debt receipts,
- 8% for additional stimulus measures.
Govt efforts:
- Centre announced borrowings of Rs 1.6 lakh crore to meet the shortfall in the GST compensation cess, which is not counted as the FD part.
- Given the higher FD, the centre needs total Rs 16.3 lakh crore borrowing including GST compensation.
- With additional borrowing by states would further make the situation worse.
- In this unprecedented borrowing programme, the Center needs RBI’s support.
- Currently, RBI is indirectly monetizing centers’ debt by injecting liquidity into the system through various channels.
- Govt & RBI are keen to keep the interest rate low despite heavy borrowing.
- The household sector’s demand for financial assets may not increase & the external sector’s demand for Indian sovereign bonds may also lukewarm.
- In this scenario, RBI’s support for the Centre makes the borrowing programme successful.
- According to monetary statements, RBI is injecting liquidity into the system in a big way.
- The growth rate in reserve money is 12.4%.
- But the injection so far is modest with M3 growth at 9.9% & the money multiplier is low.
Way Forward: –
In the Inflation discussion, focus on supply availability & bottlenecks in the distribution of commodities & output gap is relevant. But equally relevant in the analysis of inflation is liquidity in the system & its impact on output & prices with lags.
The liquidity injections have its limits & it is necessary to keep in mind the implications that liquidity expansion will have for inflation during govt spending expansion.
Question: –
On May 31, important updates regarding India’s GDP growth and the Centre’s fiscal performance for 2020-21 became available. According to NSO’s provisional estimates for 2020-21, the annual contraction in real GDP turned out to be 7.3 per cent, an improvement over the earlier estimate of 8 per cent. Enlist the economic challenges of India.