After her multiple tranches of stimulus packages were criticised for being "too little", Finance Minister Nirmala Sitharaman finally loosened her purse strings on Monday. The union budget for the financial year 2022 stars some big-ticket items involving massive spending.
The aim is simple—spend money on big infrastructure projects and hope that the trickle-down effect will lead to jobs, wealth creation and a pick-up in demand, leading to a sustainable economic recovery after the devastation caused by the lockdown.
One problem, though: The finance minister may be set to splurge big time, but where is all that money going to come from?
The government’s kitty is not exactly in the pink of health, despite all the rosy pictures being painted of GST revenues increasing by the month. Revenues plummeted since the breakout of the coronavirus and the ensuing pandemic. Meanwhile, the government had to spend to ease the hardship all around, including through the many Atmanirbhar Bharat packages.
The true picture came to light with the budget papers. While the total estimated expense was Rs 30.42 lakh crore for this financial year in last year's budget, the post-pandemic revised figure stands at 34.5 lakh crore rupees—out of which, Rs 12 lakh crore is borrowing by the government.
Worse, the fiscal deficit stands at 9.5 per cent—higher than even what the markets initially estimated. The FRBM Act mandates that the fiscal deficit is reined in to within 3 per cent, while a proposed new act suggests putting this limit lower down, at 2.5 per cent.
“Rs 80,000 crore is [still urgently] needed. [Govt] will approach the markets within two months,” the finance minister informed parliament during her budget speech about this year’s budget requirements.
Going forward, even the government admits that there isn’t much improvement expected for at least the next three or four years, as far as fiscal deficit is concerned. The finance ministry’s internal estimate is that the rate could be brought down to 6.8 per cent at best by next year. The worries over a higher rate of the deficit are two-fold—the chance of a downgrade by international rating agencies, as well as worries that it may spark off inflation.
Considering the extraordinary pandemic situation, Sitharaman had remarked in the past that she doesn’t worry about the fiscal deficit numbers too much, and it seems economists and India Inc also agree.
“We need to grow our way out,” Bajaj group’s Sanjiv Bajaj told this correspondent. Uday Kotak, MD & CEO of Kotak Mahindra Bank agrees. “It’s a bold, big bang approach, even if we are borrowing. It’s time to spend and spend it on the capital side rather than the revenue side. You are creating a long term asset. Let [the fiscal deficit] go. It will pick up in due course of time.”
