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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%.
- 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.
- 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.
- 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.
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.