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'Centre should have a clear fiscal consolidation path to bring down fiscal deficit target'

The government should have a clear fiscal consolidation path to bring down the fiscal deficit target to 4.5 percent of GDP by 2026.

February 03, 2021 / 08:23 AM IST

Finance Minister Nirmala Sitharaman presented Budget 2021 with the domestic economy still battling with the pandemic induced economic crisis. There was a consensus that the economy would require an increased government spending to bring it back to the growth track. The idea was clearly envisaged in the Economic Survey for FY21. It is reflected in the Budget, with the total expenditure for FY22 marked at Rs 34.8 lakh crore.

The major focus areas of the Budget were health and infrastructure. For the health sector, The finance minister announced PM AtmaNirbharSwasth Bharat Yojana, with an outlay of about Rs 64,180 crore. The scheme focuses to improve the capacities of primary, secondary and tertiary health care along with strengthening the existing national institutions. Rs 35,000 crore was set aside for the COVID-19 vaccination programme, and the total outlay for the health sector is marked at Rs 2.23 lakh crore.

The Budget also witnessed an infrastructure push as it has a multiplier effect on the economy. Development Finance Institution was announced to cater the financing needs of infrastructure projects. Alongside, ‘National Monetisation Pipeline’ was announced to monetise the assets for funding the infrastructure projects. The budget also announced tax exemption to foreign Sovereign Wealth Funds and Pension Funds, on their income from investment in Indian infrastructure.

Finance Minister announced recapitalisation of PSBs to the tune of Rs 20,000 crore. However, given the fiscal space of the government, recapitalisation cannot be a long-term solution. In this regard, FM Sitharaman announced the privatisation of two PSBs.

Another major announcement for the banking sector was to set up an Asset reconstruction and Asset Management company to clean up the stressed assets of the PSBs. Similarly, the disinvestment target for FY22 is pegged at Rs 1.75 lakh crore. The government aims to capitalise on the current market sentiments, and aims to complete the LIC IPO by 2022. Government should have a clear roadmap on disinvestment as it can bring relief to the exchequer.

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On the ease of doing business front, the definition of small companies was revised by increasing their thresholds for paid up capital from “not exceeding Rs 50 lakh” to “not exceeding Rs 2 crore” and turnover from “not exceeding Rs 2 Crore” to “not exceeding 20 Crore”. This would help in reducing compliance cost for the companies. Further, the FDI limit in insurance companies was hiked from 49 percent to 74 percent, by allowing foreign ownership and control.

Though there was no COVID cess, FM Sitharaman announced an Agriculture Infrastructure and Development cess on certain items. Yet, the cess is devised such that there isn’t any additional burden on the consumers.

Fiscal deficit for FY22 is pegged at 6.8 percent of GDP, with the market borrowing estimated at Rs 12 lakh crore. A higher fiscal deficit was in the expected line, and one could expect an increase in the cost of capital. In the present economic scenario, a higher fiscal deficit is justified. However, the government should have a clear fiscal consolidation path to bring down the fiscal deficit target to 4.5 percent of GDP by 2026.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
Deepthi Mathew Deepthi Mary Mathew is an Economist at Geojit Financial Services.
first published: Feb 3, 2021 08:23 am

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