Budget 2022: Medium-Term Fiscal Consolidation Path Important, Says NIPFP's Pinaki Chakraborty
Budget 2022 will need to keep one eye on growth but the other on fiscal consolidation. "There is no disagreement on the need to support growth, but we also need to move towards (fiscal) consolidation," said Pinaki Chakraborty, director of the National Institute of Public Finance and Policy.
After a spike to 9.3%, India's central government fiscal deficit is seen at 6.8% for 2021-22, according to budget estimates. Strong growth in tax collections will likely allow the government to meet this target.
"We are in a better place to deal with fiscal challenges. The way GST revenue has increased, the fiscal situation will be better than what was predicted," said Chakraborty in an interview with BloombergQuint, while declining to comment on the level of fiscal deficit likely.
Economists see the government budgeting for a fiscal deficit of close to 6% in 2022-23, while cautioning that fiscal policy ought to remain growth supportive. Chakraborty agrees but says that at a debt-to-GDP ratio of nearly 90%, room for extraordinary fiscal support is no longer there.
"That is where reprioritisation becomes important. If we look at the budgets of centre and states together, you do see that kind of reprioritisation happening from the 2021-22 budget numbers. That has to go on," Chakraborty said.
In the budget for 2021-22, the government stepped up capital expenditure. States, too, budgeted for increased capex but were slow to spend in the first half of the current year.
"Capex is a very important part of growth stimulus, but distribution of capex is also important. There, if we look at general government capex, then about two-thirds is at the state level," said Chakraborty, adding that 13 states have reported revenue deficits for 2021-22 compared to seven or eight before the pandemic.
It is very important that the reprioritisation happen at the aggregate level as well as at the individual state level. Centre's support for capex, given that revenue deficit will be lower, should automatically rise.Pinaki Chakraborty, Director, NIPFP
Alongside a focus on capex, the government also needs to provide support to those who have been hit the hardest by the pandemic. As such, redistributive policies may need attention.
There are two categories of expenditure in the budget that become critically important given the pandemic, said Chakraborty. Lives — where the government needs to continue spending on health and vaccination; and livelihood — where MGNREGA and other social protection schemes may need increased allocation.
But here, too, the role of the states is important. "About 80% of the redistributive expenditure is at the state level," Chakraborty said. "Central support for big-ticket, centrally sponsored schemes has to be there in terms of what is required for life and livelihoods, but we can't have a very high level of expenditure because we also need to consolidate in the medium term."
Commenting on discussions around the need for an urban jobs guarantee programme, Chakraborty said the idea needs to be studied in greater detail.
When MGNREGA was first introduced, it started in 100 districts, then 200 districts and only after the global financial crisis, it was expanded to the entire country. "So, an urban employment guarantee scheme has to be examined in detail."
The pattern of migration is very different across states and across cities and towns. As such, the requirement for urban job guarantees and its fiscal implications need to be studied, said Chakraborty.
For a pan-India urban jobs guarantee scheme, the fiscal cost will be very significant. So, we need to examine in detail.Pinaki Chakraborty, Director, NIPFP
States: In Cautious Mode
While the central government has tried to step up spending to support the economy this year, states have been slow to spend and have held on to large cash balances.
"We need to look at state-specific data but at the aggregate level, yes, there is a holding back of some of the spending," said Chakraborty. "I think it is a kind of precautionary measure. From next year, states are going back to the 3% fiscal deficit target," he pointed out.
States were given leeway to run a higher fiscal deficit of up to 4.5% of GDP in the current year due to the pandemic. Most, however, budgeted for a fiscal deficit lower than that.
States could have expanded more and if they had expanded on the capex side, that would have been a stimulus too. The point I am trying to make is that, given the fiscal space, there is still scope for higher spending.Pinaki Chakraborty, Director, NIPFP
States also go into next year facing the uncertainty over GST compensation, which is due to end in June 2022.
In 2017, when the Goods and Services Tax was introduced, in return for giving up their taxation rights, states had been assured via a constitutional amendment and law that the centre would compensate them for five years for any shortfall in revenue, assuming a 14% increase in states' indirect tax revenue per year.
"I think it is important to recognise conceptually that we need to delink compensation from Covid-induced fiscal shock," said Chakraborty.
The Covid-19 crisis has certainly had an impact on state finances but the impact has been asymmetric across different states. If more support is required by states following the Covid crisis, it should be provided by the centre, which constitutionally, has more revenue raising avenues.
"But to say that since there was Covid and it has impacted revenue, GST compensation should continue for another few years, that argument to my view is weak," said Chakraborty.
Watch the full interview below: