Budget 2022: Will FM be able to balance growth and fiscal deficit?

Budget 2022

The COVID-19 pandemic has hindered many ambitious plans of the government, atleast has hampered the pace of development. The sharp decline in private consumption has severely affected the overall demand in the economy, forcing the government to interfere and help in economic recovery by giving various stimulus packages, subsidies, public spending, etc. This has subsequently increased the government’s borrowing. All these factors have affected the fiscal deficit of the country, particularly the government's plan to contain it by a large margin within a few years. 

Now that the 2022-23 budget is on the way, it would be very interesting to see what the government chooses- will economic growth be given priority over fiscal consolidation, will there be some definite measures to decrease the deficit, or the government is going to find a middle way?

Current Fiscal Deficit and Government’s Ambitions

The current fiscal deficit, or the fiscal deficit of the year 2021-22 is pegged at 6.8% of the GDP. The government plans to reduce the figure to 4.5% of the GDP by the year 2025-26, suggesting a steady consolidation instead of an aggressive cut. This also suggests that the government is going to keep its growth priority plan on top. The current public debt stands at 90% of the GDP, keeping this under check is also going to be on the government’s priority list with the 2022-23 Budget.

It is also seen that the borrowings by both central and state governments have increased significantly over the years. The Central government has borrowed over 12 lakh crores in FY2022, while the borrowing by states is at 8.7 lakh crores. The reason behind this increased borrowing is obviously the coronavirus pandemic. Now that the Omicron variant has failed to hamper the economy materially, and we are not going to see a decline in demand like that of 2020 and 2021, the borrowing might also decrease in the coming years.

Pandemic, Fiscal Deficit and Recovery

The fiscal deficit as a percentage of GDP in the first pandemic year was at 9.5%, thanks to the launch of AtmaNirbhar Bharat package and the liquidity support rolled out by the RBI. In the same year, the states’ fiscal deficit went over 3% of the GDP, supplemented by revenue losses and public spending. However, the fiscal deficit of 2022 is likely to see a healthy consolidation as the revenue has increased along with a decrease in public spending.

Having said this, the rise in gross fiscal deficit or net fiscal deficit has been a global phenomenon, not only limited to India. Every country in the world suffered a lot due to the COVID pandemic.

Expectation from Budget

Apart from the general growth and fiscal deficit perspective, the Finance Minister will have to take credit rating agencies into consideration as well. With increased public debt, budget deficit, decline in government budget balance, and other such factors, the credit rating of India might get hampered. To avoid this, the government will have to atleast show some major effort towards deficit consolidation. Obviously, this is going to come at the expense of the priority given to growth.

Trends in Fiscal Deficit

What caused the rise in the fiscal deficit? The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 gave the government a clear vision towards complete debt consolidation. In FY2012, the fiscal deficit was brought down to 5.8%. In FY2019, the figure went to as low as 3.4%. The spike in fiscal deficit was seen with the advent of the COVID pandemic only. The government had to borrow and spend more, resulting in a decline in the fiscal balance. 

The 2022-23 Budget is also important because it is going to show how the government will react to the withering away of the COVID pandemic’s scathing blow to the economy. The borrowing and spending are likely to reduce but will debt consolidation be given the top priority? Let the Finance Minister reveal what she has this time.