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Pandemic pushes India’s fiscal deficit to 9.5% in 2020-21, estimated at 6.8% in 2021-22

Govt to discontinue practice of Food Corporation of India borrowing from National Small Savings Fund for food subsidy — a means used to hide the true extent of fiscal deficit.

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New Delhi: India’s fiscal deficit is estimated at 6.8 per cent of gross domestic product (GDP) in 2021-22 as the government looks to increase spending to revive growth in the pandemic-battered economy.

With the pandemic leading to a sharp contraction in tax revenues, India’s fiscal deficit for 2020-21 zoomed to 9.5 per cent of GDP, as against the 3.5 per cent budgeted. 

The expenditure for 2020-21 has been augmented to Rs 34.5 lakh crore in 2020-21 from the initially budgeted Rs 30.42 lakh crore, Finance Minister Nirmala Sitharaman said as she presented the Union Budget 2021-22, her third, Monday.

The quality of expenditure has also been maintained, with capital expenditure during the fiscal year at Rs 4.39 lakh crore, as against the initially budgeted Rs 4.12 lakh crore, she added.

Sitharaman said the government will try to achieve a fiscal deficit of 4.5 per cent of GDP by 2025-26 by increasing buoyancy of tax revenues through increased tax compliance as well as asset monetisation over the years.

The government will also stop the practice of the Food Corporation of India (FCI) borrowing from the National Small Savings Fund to power the food subsidy, a practice that was used over the last few years to hide the true extent of the fiscal deficit. 

The fact that the government will adopt an expansionary fiscal stance was indicative from the push for fiscal spending made in the economic survey presented Friday. 

The survey had made a case for higher spending, especially in infrastructure, arguing that this will provide a much higher growth multiplier as compared to revenue spending due to its linkages with other industries as well as its potential to provide employment.  

It had also favoured a countercyclical fiscal policy, entailing higher expenditure during a recession to revive growth. 

On the revenue side, the economic survey’s calculation that nominal GDP growth or real GDP growth plus inflation will be over 15 per cent which will provide a boost to tax revenues.

Also Read: Why Budget 2021 will be different — govt doesn’t need to hide real fiscal deficit this time

Pandemic impact

When Sitharaman presented the budget in February 2020, the impact of the pandemic on the economy and, consequently, government finances, had not been anticipated. However, in the subsequent months, the government saw its tax revenues contracting significantly even as there was an increase in expenditure. 

The government also fell substantially short of meeting its Rs 2.1 lakh crore disinvestment target. This forced the government to borrow Rs 12 lakh crore from the market, nearly 50 per cent more than the initially estimated Rs 7.8 lakh crore.  

According to the medium-term fiscal policy statement that the government presented in February 2020, it had projected the fiscal deficit for 2021-22 and 2022-23 at 3.3 and 3.1 per cent, respectively. It has laid out a new path in this Budget

Also Read: We will spend money to help economy, not worry about fiscal deficit – Nirmala Sitharaman


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