Economic Survey 2020-21 prioritises growth over fiscal consolidation

Three important releases on 29 January 2021 provide critical clues to both policy direction and the likely magnitude of the fiscal aggregates in the forthcoming budget for 2021-22. The first of these releases, that is, the Economic Survey for 2020-21, provides crucial signals relating to the likely fiscal policy stance of the budget for the forthcoming year as well as for the medium-term. The second release, by the CGA, provides updated information regarding centre’s fiscal aggregates up to December 2020. These numbers portray a relatively sharp improvement in central government’s gross and net tax revenues. The third release pertains to the NSO’s first revised estimates for GDP and GVA for 2019-20. These would have implications for the base numbers for the union budget’s fiscal aggregates. Bringing together this set of important and updated information, it may be feasible to formulate an idea about critical budget magnitudes as well as its thrust and prioritization.

The performance of central taxes up to December 2020 presents a relatively stronger recovery in tax revenues than what was indicated by this data up to the last month. In fact, the expected contraction in centre’s gross tax revenues for the full year of 2020-21 may turn out to be much lower than what was widely anticipated earlier and in fact, there may be a reasonable positive growth in centre’s net tax revenues. The contraction of (-)12.6% in centre’s gross tax revenues during April-November 2020 significantly reduced to (-)3.2% up to December 2020. Centre’s net tax revenues, which showed a contraction of (-)8.3% up to November 2020, now shows a positive growth of 6.3% up to December 2020. For the full year therefore, there may not be a contraction in the net tax revenues, and possibly even the gross tax revenues of the centre. This is despite the expected contraction of (-)4.3% in the nominal GDP for 2020-21, taking into account the latest NSO release for the first revised estimates of GDP growth for 2019-20. The growth numbers indicated by the Economic Survey signal a healthy potential tax revenue growth for 2021-22. The nominal GDP growth has been estimated at 15.4%. Applying a buoyancy of about 1.2, a growth of close to 18.5% in centre’s gross tax revenues may be feasible for 2021-22. This, supplemented by a reinvigorated disinvestment and spectrum sales program, would provide adequate revenues to accommodate sectoral priorities in favour of health expenditure and capital expenditure as advocated by the Economic Survey. In fact, centre’s resources may be further augmented by the levy of one or two additional cesses such as a Covid cess and a defence cess.

Although not explicitly stated, the Survey conveys a revised fiscal consolidation path where, in the years immediately following the Covid crisis, the fiscal deficit to GDP ratio may be reduced by smaller margins, and as growth picks up, this margin of reduction may become higher. We expect that centre’s fiscal deficit relative to GDP may be in the range of 6-6.5% in 2020-21 and 5-5.5% in 2021-22 and then it could gradually be reduced towards the FRBM target of 3%. The Fifteenth Finance Commission, whose final report would also be tabled on 1 February 2021 along with the Union Budget, may indicate more clearly, a revised fiscal consolidation roadmap.

The expected positive outcome of a growth-supporting fiscal stimulus would be critically dependent on government’s ability to emphasise infrastructure investment in line with the National Infrastructure Pipeline (NIP) in which along with the central government, the state governments, central and state public sector enterprises, and the private sector have important roles to play. However, it is centre’s lead in this investment program which will provide the required crowding in effects for attracting investment from the subnational governments and the private sector. India’s recovery can potentially be faster than many other economies if the budgetary allocations are appropriately prioritized and implemented in line with the signals given by the Survey.

(D K Srivastava is Chief Policy Advisor at EY India. The views expressed are personal.)

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