The government has set a five-year long fiscal consolidation path from 9.5 per cent of GDP in 2020-21 to 4.5 per cent by 2025-26. This clearly indicates the need for higher capital expenditure and also provision for shortages in revenues as the full recovery would take time.
But should one believe in government's promise to return to fiscal consolidation path of 4.5 per cent by 2025-26?
The fiscal deficit of 9.5 per cent in 2020-21 and 6.8 per cent of GDP in 2021-22 crosses the level of global financial crisis. In fact, the numbers are much above the market expectations. The worry is the government sticking to the consolidation path. The past 10-year track record of fiscal consolidation isn't encouraging. It may be remembered that the government had to give a fiscal stimulus post the global financial crisis in 2008, which pushed the fiscal deficit to 6.2 per cent in 2008-09 and 6.6 per cent in 2009-10.
Over the last decade , the fiscal deficit numbers did come down from high levels to a low of 3.4 per cent 2018-19, but failed to go down to an acceptable 3 per cent. This was despite economic recovery and falling oil prices. In fact, demonetisation, GST, bankruptcy code, RERA in real estate had impacted the growth and the revenue collection.
Clearly, the need for higher capital expenditure and lower revenue realisation resulted in higher fiscal deficit last year. The government spending was needed to sustain economic recovery post Covid lockdown. The fiscal deficit at 9.5 per cent in 2020-21 has surprised everyone as the expectations were of around 7 per cent. The proposed fiscal deficit of 6.8 per cent for 2021-22 is also on the higher side as market was expecting it to be around 5.5 per cent.
The Economic Survey 2021 has said that any deviation from the path of fiscal consolidation may be shot lived as fiscal indicators rebound with the recovery in the economy. The survey had called for boosting GDP growth which would be important for enabling a sustainable fiscal path in the medium term.
The target for gross market borrowings of the Central Government for the financial year 2020-21 was revised from the Budget estimate of Rs 7.8 lakh crore to Rs 12 lakh crore.The borrowing target for 2021-22 is kept at Rs 12 lakh crore. This is certainly going to be a challenge for the RBI to raise the resources at a lower cost. The inflation numbers are already at a higher level than the targeted.
In terms of higher borrowing going forward, the Economic Survey 2020-21 builds a case that higher growth leads to debt sustainability in an emerging economy like India because of higher GDP and lower interest rates. The public debt to GDP ratio, which was around 66-68 per cent for many years, is now expected to jump to 80 per cent plus in 2020-21.
This kind of debt-to-GDP ratio will be the highest in the last two decades.
Expecting a reaction from global rating agencies which looks at fiscal deficit and public debt, the Economic Survey 2020-21 had earlier hit out at rating agencies for not looking at the fundamentals and the size of the economy.
Currently, India is rated investment grade by three major rating agencies - S&P, Moody's and Fitch. Post Covid, Moody's has retained a negative outlook on India's rating. Fitch had also changed the outlook to negative. S&P had, however, reaffirmed its rating and outlook.
Also read: Budget 2021