Centre, states must continue counter-cyclical fiscal measures: RBI article

The Centre and state governments need to continue with the counter-cyclical fiscal measures to sustain the momentum of economic growth which went through a rough patch following the outbreak of the coronavirus pandemic, according to an RBI article.

"Capital expenditure, which collapsed in H1:2020-21, will need to be scaled up as a priority. Public investment in healthcare, social housing, education and environmental protection is the need of the hour to build a more resilient and inclusive economy," said the RBI article on 'Government Finances 2020-21:A Half-Yearly Review'.

The governments, it added, will have to effectively balance between continued fiscal support for the fragile recovery process and addressing the medium-term debt-deficit imbalances, while ensuring good housekeeping and adequate transparency in the fiscal reporting.

The economic growth dipped by 23.9 per cent in the first quarter of the current financial year on account of the impact of the coronavirus pandemic. The contraction, however, narrowed to 7.5 per cent in the second quarter and growth is expected to turn positive in the third quarter.

"Notwithstanding the severe impact of COVID-19 on government finances already realised in H1, it is imperative for Centre and states to continue with the counter-cyclical fiscal measures to sustain the momentum of the recovery," the article said.

The paper noted that Gross Fiscal Deficit (GFD) for the Union Government in 2020-21 crossed 100 per cent of the budgeted amount by the fourth month of the financial year (July 2020), and stood at 119.7 per cent of the budgeted amount by October 2020.

For states, H1:2020-21 GFD stood at 58.4 per cent of budgeted amount, significantly higher than the 35-40 per cent observed in a normal year.

With deterioration in fiscal balances at both levels of government, the combined GFD (centre plus states) in H1:2020-21 stood at 85.9 per cent of BE, significantly higher than 70 per cent in H1:2019-20, said the article authored by Rahul Agarwal, Ipsita Padhi, Sudhanshu Goyal, Samir Ranjan Behera and Sangita Misra in the Fiscal Division of Department of Economic and Policy Research (DEPR), RBI.

The RBI said the views expressed in the article are those of the authors and do not necessarily reflect the views of the central bank.

As per the article, the build-up of combined fiscal deficit in H1:2020-21 is sharper, but attributable mostly to the developments in the first quarter.

Going forward, with the severest impact of COVID-19 on government finances already realised in the April-June quarter, there is scope for the Centre and states to continue with the counter-cyclical fiscal support, which is necessary to sustain the momentum of recovery, it said.