Budget 2021: Consider A Mid-Year Fiscal Deficit Reset In FY22, Says Indira Rajaraman
A digital clock is displayed on an overpass inside the empty Delhi Junction railway station during a lockdown imposed due to the coronavirus in Delhi, India. (Photographer: T. Narayan/Bloomberg)

Budget 2021: Consider A Mid-Year Fiscal Deficit Reset In FY22, Says Indira Rajaraman

Projections made when the government presents its Union Budget on Feb. 1 should be subjected to a mid-year review given the prevailing volatile economic conditions. That’s according to economist Indira Rajaraman, a member of the 13th Finance Commission.

The Covid-19 crisis threw the budget for 2020-21 into disarray as government revenue collections plunged due to the nationwide lockdown imposed to curb the virus. As a consequence, the fiscal deficit for the soon-to-conclude year will likely rise to between 6.5-8%, based on projections from different agencies. For the coming fiscal, too, some uncertainty may persist on revenue and expenditure as the economy recovers.

Budget 2021: Consider A Mid-Year Fiscal Deficit Reset In FY22, Says Indira Rajaraman

“If I were to prescribe an approach for the coming fiscal year, it would be this. We should have a budget estimate, which will carry with it a formal provision that at the end of November, there will be a reset of the deficit and spending projections,” said Rajaraman in a conversation with BloombergQuint. This could be done for the next two years till economic conditions settle.

Beyond that, the idea of a range for the fiscal deficit is a “good one”, said Rajaraman. The 15th Finance Commission, whose recommendations will be tabled along with the budget, may consider prescribing a range for the yearly fiscal deficit in contrast to the tradition of having a fixed number each year.

The idea of having a fixed [fiscal deficit] target hasn’t worked well for us. What it has meant is an attempt to stick to the target at all costs. Expenditure is swept under the carpet, payments are delayed, which have had a devastating impact on the real and financial economy... A range is very good thing but it wouldn’t hurt to start the year with a fixed target which can be re-examined and adjusted within the range.
Indira Rajaraman, Economist

Rajaraman has in her writings described the Fiscal Responsibility and Budget Management Act as “a statement of aspirational intent”. The FRBM Act, which dates back to 2002, has been tweaked a number of times as government finances have veered from the prescribed course.

The 15th Finance Commission will need to once again reset the roadmap. But should that roadmap still move the economy towards a 60% debt-to-GDP ratio and a 3% fiscal deficit target?

The first thing the government should do is start from a clean slate, said Rajaraman.

“Now that all observers agree that this is a time for the fiscal gates to be opened, the time has now come for the government to pay back all past dues, start from a clean- slate,” she said. Going forward, the government should declare that not more than 5-10 working days will lapse between the approval of work and the actual payment to a contractor. “That will do a great deal to restore fiscal transparency and credibility.”

A wider rethink will need the government to first make an assessment of the nominal GDP growth that is achievable in the medium term. “If, after two years, we can confidently achieve the 11.5% nominal GDP growth that the FRBM Review Committee had forecast, that allows us to go back and map out the debt-to-GDP ratio target and the fiscal deficit target needed to get there,” Rajaraman said.

The 60% debt-to-GDP ratio target prescribed by the FRBM review committee may still be a stretch though. We don’t need to go that far, said Rajaraman, adding that 70% would be fine as well. With a high nominal GDP growth, a 70% debt-to-GDP ratio wouldn’t require that punishing a fiscal deficit as well, she added.

We’re still a country where children are being stunted for the lack of nutrition. That calls for revenue expenditure not capital expenditure. We’re a country with unpaved roads, bridges falling down, buildings collapsing. So there are a number of places where expenditure is not just desirable but essential. We need not tie ourselves down to a 60% debt-to-GDP, especially since that is not going to get us any enhanced virtue in the eyes of financial markets.
Indira Rajaraman, Economist

Along with a reset of the fiscal roadmap, some economists have suggested an independent fiscal council. Such a body, set up along the lines of the U.S. Office Of Budget and Management, can potentially help keep a watch on runaway government spending or the quality of accounts.

Rajaraman doesn’t see much merit in this idea in the Indian context. She was a member of the 13th Finance Commission which suggested such a council but wasn’t a supporter of the idea even though she didn’t formally dispute it.

In order for a fiscal council to function, it would need to have the projected and committed expenses of all the government departments. They would need close data cooperation from the finance ministry, other ministries and state governments if it is a national fiscal council.

“There are a lot of turf wars between the government departments. Can you really see departments giving this fiscal council the data when they know fully well that the council is going to sit in judgment of it. They are not going to get the data and without it, they cannot do anything,” Rajaraman said. “The fiscal council will only complicate things, it won’t get us anywhere.”

Watch the full conversation on the fiscal reset and the government’s spending priorities below:

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