Fiscal focus

Govt must aim for faster consolidation

The National Statistical Office last week released the first advance estimates of national income for the ongoing fiscal year, 2022-23. This is a vitally important data release because these estimates form the basis for the process of designing the Union Budget, which is due to be presented at the beginning of next month. Real growth in the ongoing fiscal year is expected to be 7 per cent, year-on-year, according to these estimates. This is not exactly cause for celebration, because the economy in 2021-22 was still recovering from pandemic-induced disruptions. It is worth noting that, for example, although manufacturing grew almost 10 per cent in real terms in the previous fiscal year, this year it is estimated to grow only 1.6 per cent.

This would cause the impression that the slack in the system in this sector caused by the pandemic was almost all made up last fiscal year. As compared to the pre-pandemic trend line, therefore, there is likely to be permanent scarring and lost output in several sectors. The crucial fact is that the estimated real gross domestic product (GDP) at 2011-12 prices for 2022-23 is estimated to show only 8.6 per cent growth over the second revised estimates for the year 2019-20, a year only slightly affected by the pandemic. It should be clear that, if India has returned to its baseline growth now, three years after the pandemic hit, then it has lost at least one and a half years, if not more, of output growth.
 

The question now must be where growth is to come from. In the past three years, the government picked up a great deal of the slack. In 2020-21, for example, government final consumption expenditure was 11.3 per cent of GDP, an increase of over a percentage point from its share in 2019-20. This has come down only slowly to an estimate of 10.3 per cent in the ongoing year. The cost of this government spending has been high in terms of India’s debt-to-GDP ratio. Price pressures have also built up, aided by a global inflationary environment. The effects of this inflation are visible in the sharp shift in nominal growth rates. The Union Budget, presented prior to the Russian invasion of Ukraine and consequent increases in commodity prices, assumed a nominal growth rate for 2022-23 of 11.1 per cent. But the first advance estimates have had to shift that nominal growth rate upwards to 15.4 per cent. The government will also spend additional money — Rs 3.26 trillion — mainly to insulate Indian consumers from commodity price upswings through food and fertiliser subsidies.

Yet even so there remains room, thanks to this growth in nominal GDP, for fiscal consolidation. The fiscal deficit for the ongoing year was pegged at 6.44 per cent of GDP. Now that the denominator of that number — nominal GDP — has increased more than expected, the government has an important opportunity to speed up the rate of fiscal consolidation. Greater ambition in terms of fiscal consolidation will pay dividends in the medium-term future. It will reduce inflationary pressure and increase the space for private investment and induce growth dynamism in the economy. Policymakers in the finance ministry should not miss this opportunity.