Unreliable Growth Estimates Prompt India To Drop Expenditure Forecast

The government won't make expenditure projections for the next two years because of “non-robust” GDP estimate as growth assumptions are needed to make a "meaningful" spending forecast.

The government won’t table its medium-term expenditure statement—which it’s mandated to as per the Fiscal Responsibility and Budget Management Act, 2003—that would contain projections for financial years 2021-22 and 2022-23, the Finance Ministry said in its report. The government has to lay the medium-term expenditure framework in the Parliament in the session followed by the Budget session.

The ministry, in the report, said it’s not possible to obtain reliable projections of GDP growth due to the continuing impact of Covid-19 outbreak on the Indian economy. Growth assumptions, and government tax receipts are essential for ‘meaningful’ expenditure projections, it said.

The Coronavirus pandemic has ravaged the Indian economy, which is set for its first contraction in at least four decades. Tax collections have dropped by nearly a third year-on-year in the quarter ended July, but it has to give a push to the economy by increasing government expenditure, and announcing a fiscal stimulus.

The medium-term expenditure projections are made by considering a nominal increase in the current year’s anticipated expenditure, the ministry said in the report. However, the current year’s expenditure would be “artificially inflated” due to relief measures announced to fight the Covid-19 outbreak, the report said.

“It may be difficult to tease out the transient components of Pradhan Mantri Garib Kalyan Package and Aatmanirbhar Bharat Abhiyan Package,” the report said. Hence, expenditure estimates may be unreasonably high providing an inaccurate fiscal plan, “and a faulty foundation for upcoming budgets,” it said.

The report also said the accepted recommendations of the 15th Finance Commission for transferring tax receipts to states and grants to local bodies are applicable only till March 31, 2021. The share of taxes and other grants for financial years 2021 to 2026 would be based on the final report of the 15th Finance Commission which would be submitted to the government in October-end, the report said.

Fiscal Deficit Deviation

India deviated from its revised fiscal deficit target of 3.8% of GDP for 2019-20 “on account of structural reforms, both on the supply and the demand side” carried out by the government, the report said. The government had invoked an escape clause in the FRBM Act that allowed it deviate 0.5 percentage points from the budgeted fiscal deficit target. However, actual fiscal deficit for the previous fiscal was 4.6%.

The reason for the deviation was reforms undertaken to boost economic performance, and ensure India remains close to its potential growth, the finance ministry said.

“However, the Covid-19 related uncertainty makes any forecast of economic growth and fiscal variables including the specification of a return path challenging,” it said.

The government “endeavours” to return to the path of fiscal consolidation as soon as economic growth return to their long-run averages, it said.