India's Covid-19 fiscal stimulus was relatively small, say experts

The International Monetary Fund (IMF) said last week that to maintain external sector balance at a comfortable level over the medium term, India should gradually withdraw its fiscal and monetary policy stimulus. It must also develop export infrastructure and negotiate free-trade agreements with key trading partners to provide a sustainable boost to exports, it said.

With the latest round of repo rate hike by the Reserve Bank of India (RBI), all the pandemic rate cuts have now been reversed.

On the fiscal front, most economists say that the measures announced by the Centre — as part of the ‘Aatmanirbhar Bharat’ package — were mostly in the form of credit and loan guarantee, and India’s fiscal measures.

By most estimates, the fiscal outlay of the Rs 21-trillion ‘Aatmanirbhar Bharat’ set of initiatives announced in March and May 2020 was less than Rs 3 trillion.

Of the Rs 6.3-trillion relief package announced in June 2021, the fiscal outlay was less than Rs 50,000 crore. Of the direct fiscal measures announced then, only free food under the Pradhan Mantri Gareeb Kalyan Anna Yojana remains.

“The fiscal stimulus provided by the Centre during the pandemic was measured relative to other countries. One of the larger programmes — that is still continuing — is the free food grain scheme, which has been extended till September 2022,” said Aditi Nayar, chief economist at ICRA.

The fiscal measures taken this year, including committing higher-than-budgeted fertiliser subsidies and cutting excise duties on petrol and diesel were due to inflationary pressures caused by the war in Ukraine. It was not because of the pandemic.

“Spike in the fertiliser subsidy requirement is a fallout of the Ukraine war. If this expenditure overshoot had not arisen, the government would probably have been able to demonstrate reasonable fiscal consolidation in the current year,” said Nayar.

Another way of looking at the fiscal situation is that the medium-term fiscal deficit target of 3 per cent of GDP, as mandated by the Fiscal Responsibility and Budget Management Act, no longer holds ground. Though the Act has not been amended, the medium-term fiscal deficit target is 4.5 per cent for FY26.

This also means that the current government budget deficit (Centre plus states) is over 10 per cent, as opposed to the mandated 6 per cent.

“We neglect one important aspect of fiscal policy, which is the public debt numbers. Right now, the general government debt-GDP ratio is at 96 per cent, compared to a desirable level of 60 per cent. Until one sees that, one cannot understand the fiscal problem. Unfortunately in India, we think of fiscal policy as a short-term issue,” said NR Bhanumurthy, vice-chancellor of Dr BR Ambedkar School of Economics, Bengaluru.

As the chart shows, the budget deficit expanded significantly in FY21, the first year of Covid-19, from Rs 7.96 trillion (3.5 per cent of GDP) to Rs 18.18 per cent (9.2 per cent). This wasn’t just due to fiscal stimulus but also because revenue collections crashed owing to the economic slowdown caused by the nationwide lockdown.

For FY23, the fiscal deficit target is Rs 6.4 per cent of GDP. The fertiliser subsidy for the year could exceed the budget estimates by Rs 1.45 trillion. And, the excise duty cut in petrol and diesel may lead to revenue foregone of Rs 85,000 crore.

However, direct tax and goods and service tax collections have been very encouraging so far. Economists believe that higher inflation will lead to higher nominal GDP, and hence, stronger tax collections.

“Even though the government committed a lot of expenditure, the revenue position is quite buoyant. Most likely, the revenue numbers are going to offset the increase in expenditure. In that case, the fiscal deficit should be close to the budgeted numbers. The only point of concern could be if the PMGAY (Pradhan Mantri Gramin Awas Yojana) is extended beyond September,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India.