Centre, states should avoid sharp fiscal tightening in FY2022, says ICRA

In FY2022, sharp fiscal tightening should be avoided by both the Centre and the state governments as it would temper the much-awaited economic recovery, said ICRA Principal Economist Aditi Nayar.

Speaking about the upcoming Budget 2021, she noted that in any case, revenue normalisation would ease the fiscal strain in the coming year.
A revenue deficit of 3.5 percent of GDP and a fiscal deficit of around 5 percent of GDP for the Government of India may allow enough space for prioritising health expenditure, vaccine rollout as well as capital spending, based on the revenue rebound that is widely expected in FY2022. Given the continuing uncertainty, tax changes should be avoided at this juncture, in our view, and the focus should instead be on maximising disinvestment proceeds, Nayar said.

The Fifteenth Finance Commission’s recommendations on revenue sharing and fiscal deficit targets, the borrowing permission to be granted by the GoI, and the extent of improvement that can be realised in their own tax revenues, will guide state fiscal trends in FY2022, she observed.

"A fiscal deficit target of 3.5 percent of gross state domestic product (GSDP) for the state governments for FY2022, may allow them to prioritise a portion of the capital expenditure that had to be deferred during the pandemic, and provide some funds towards projects under the National Infrastructure Pipeline (NIP)," she said.