Budget 2021: Government Gets Brownie Points For Fiscal Transparency
A member of security staff use a sniffer dog to inspect sacks of budget papers at Parliament House in New Delhi, India, on Saturday, Feb. 1, 2020. Photographer: T. Narayan/Bloomberg

Budget 2021: Government Gets Brownie Points For Fiscal Transparency

The Indian government’s decision to clean-up fiscal accounting was partly responsible for the higher-than-expected fiscal deficit, said economists in response to the Union Budget presentation.

The government reported a fiscal deficit of 9.5% of GDP for FY21 and projected to bring it down to 6.8% in FY22. This was higher than market expectations.

A key reason for this was that the government chose to account for borrowings of the Food Corporation of India on the budget. Until last year, these borrowings, which were sourced from the National Small Savings Fund, were part of extra budgetary resources.

There has been a reduction in Extra Budgetary Resources (EBR) to only Rs 30,000 crore or just 0.1% of GDP compared to Rs 1.48 lakh crore or 0.73% of GDP in FY21 and Rs 1.26 lakh crore or 0.65% of GDP, said Kaushik Das, chief India economist at Deutsche Bank. “A similar decision has been taken in the case of food subsidies, where the entire allocation has been provided on-budget (Rs 2.43 lakh crore or 1.09% of GDP), instead of funding part of it from the NSSF corpus, as was the usual practice in the last few years.”

This, Das said, was responsible for the higher than expected fiscal deficit projection of 6.8% of GDP. “We welcome this move as it gives a much clearer picture of the fiscal position and helps to usher in transparency,” he said.

Rahul Bajoria, chief India economist at Barclays agreed.

The ‘real’ fiscal deficit had begun to draw attention largely led by off-budget borrowings by the Food Corporation of India. Now that the government has done away with that practice, thereby allaying concerns over a rising budget gap without building of any assets, a higher real fiscal deficit may no longer present a concern.
Rahul Bajoria, Chief India Economist, Barclays

Two items that remain part of extra budgetary resources include Rs 7,000 crore to be raised by Air India via fully serviced bonds and Rs 10,200 crore raised by the railways.

“What I was hoping for is a clean break from the way of doing things and get a sense of what the real picture looks like. On that score, I would give this budget a 100 marks,” said Ananth Narayan, associate professor of finance at SP Jain Institute of Management and Research.

The transparency has brought a clearer picture of the fiscal deficit to light but that still leave the government with a large deficit.

With the central government deficit being pegged at 6.8% and states being allowed to maintain a 4% fiscal deficit in the coming fiscal, the strain on government finances persists.

Devendra Pant, chief economist at India Ratings and Research said that to then obtain a true picture of government finances, general government deficit would have to be considered along with state fiscal deficit, borrowings by urban local bodies and by central public sector undertakings.

Under-Promise & Over-Deliver

Narayan said that the government may also be moving towards under-promising and over-delivering, reversing a period in which it failed to meet aggressive budget projections. This led to a widening gap between the budget estimates and the revised estimates.

While the year FY21 is an outlier, the tax revenue projections for FY22 look achievable, said economists.

We think the tax revenue assumptions made in the budget are rather conservative, and could potentially mean a lower deficit by about 0.4% of GDP in FY21 and FY22. Other numbers such as nominal GDP growth, disinvestment target and the mix of capital and current spending, appear reasonable.
Pranjul Bhandari, Chief India Economist, HSBC

“The fiscal arithmetic of the FY22 budget is more convincing than earlier years. At the core of budget is the nominal GDP growth of 14.4%,” said Pant of India Ratings in a report.

The Net-tax revenue/GDP ratio is budgeted to increase to 6.93% in FY22 from 6.90% in FY21, which appears quite achievable. Gross and net tax revenues are budgeted to grow at 16.4% and 15.6%, respectively, which also appears plausible.

“If the trend of higher GST collections witnessed in 3QFY21 due to the plugging of leakages continues, along with a growth recovery in FY22, it may help the government achieve or even surpassing the FY22 GST collection targets. The net tax collection of central government has grown more than 50% year on year in the third quarter of FY21,” Pant said.

To be sure, the government has still budgeted for an aggressive Rs 1.75 lakh crore from disinvestment in the new year.

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