Conservative budgeting

Fiscal space should be used carefully

The Union government is confident of achieving the fiscal deficit target of 6.4 per cent of gross domestic product (GDP) in the current fiscal year despite seeking Parliament’s approval to spend Rs 3.26 trillion over the Budget estimates. This has been made possible because of conservative budgeting at multiple levels. The government, for example, budgeted for 9.6 per cent growth in its tax revenue over the revised estimates for 2021-22. The revised estimates were calculated to have grown by more than 23 per cent over the previous year. The government also assumed in nominal terms the Indian economy would grow by just about 11.1 per cent in the current fiscal year. The first advance estimates for national income, released last week, show the economy is expected to grow by 15.4 per cent at current prices this fiscal year.
 

A higher than expected expansion in the economy gives the government additional space to spend while maintaining the stated fiscal deficit as percentage of GDP. For example, this fiscal year higher nominal growth has given the government additional fiscal space worth Rs 97,000 crore. Besides, higher growth has boosted tax collection. Given the recent developments on the fiscal front, it can be argued that underestimating growth and revenue collection can affect overall expenditure efficiency. However, given the state of India’s public finances, the conservative approach adopted by the finance ministry after the pandemic serves India well. The government often struggled in the past to meet the fiscal-deficit target and ended up either reducing capital expenditure or shifting revenue expenditure outside the Budget. Such outcomes in the present situation — both the debt-GDP ratio and fiscal deficit are at uncomfortably higher levels — could create risks.

It thus makes sense to have some fiscal flexibility to deal with evolving demands on the Budget during the year. To be sure, it is hard to anticipate both expenditure and revenue collection with precision at the time of presenting the Budget. A sharp move in commodity prices, for instance, can upset Budget calculations. While it is sensible for the government to adopt a conservative approach in Budget making, it is worth debating what it should do if additional fiscal space is available during the year. The easiest and advisable path at this stage would be to reduce the deficit and aim to reach the stated medium-term fiscal targets as early as possible. The other possible path could be to deploy additional resources in building physical and social infrastructure. While the government has increased capital expenditure in recent years and is building physical infrastructure, it could potentially spend more on education and health.
 

This would require some amount of flexible budgeting. The government could also spend additional resources on defence, which needs higher capital expenditure. It is worth noting in this context that a flexible budgeting approach will work better if the government has a clear and transparent medium-term fiscal consolidation road map. It would also do well to announce in advance the areas where it will spend additional resources so that funds can be allocated during the year. In the absence of such a plan, it may end up using additional fiscal space without any longer-term benefit as is happening currently. The government must aim to make the most of its expenditure.