Macroeconomic Framework of Union Budget 2021-22: Reconsidering The Fiscal Rules
Macroeconomic Framework of Union Budget 2021-22: Reconsidering The Fiscal Rules
No. 328
03-March-2021
Lekha Chakraborty
Lekha Chakraborty
Abstract
Thanks are due to Divy Rangan for research assistance. This paper was published in EPW
Budget Special 2021.
The anatomy of the high fiscal deficit number announced in the Union Budget
2021 is relevant here. It is a combination of revenue shortfall, and new expenditure
priorities. Strengthening of “budget transparency” by incorporating prior off-budget
borrowings has also led to the rise in deficit number. The Food Corporation of India’s (FCI)
borrowing from the National Small Savings Fund (NSSF) is stopped, to bring in budget
transparency. When FY2021 fiscal deficit has reached 9.5%, the government envisions to
borrow another `80,000 crore in the next two months. For FY2022, the fiscal deficit is
pegged at 6.8% of GDP (Table 1).
The existing fiscal rules were amended to incorporate the revised threshold of
deficit to GDP. In the 2018 amendment to the Fiscal Responsibility and Budget
Management (FRBM) Rules 2004, the “golden rule” of zero revenue deficit was eliminated
and the clauses related to the elimination of “revenue balance” were incorporated in the
financial bill. However, in 2021–22 BE, revenue deficit is 5.1% of GDP. Though there was
a debate within the FRBM committee regarding the choice of deficit, whether revenue
deficit, fiscal deficit or primary deficit as the “operational deficit parameter” in India—
with Arvind Subramanian’s dissent note favouring the primary deficit (fiscal deficit minus
interest payments), the Union Budget 2021 reiterated that fiscal deficit is still the
operational concept of deficit in India. However, primary deficit is a useful concept to
understand the current fiscal stance of the government, without the legacy of interest
payments.
The sources of financing the fiscal deficit in the Union Budget 2012 show that
gross market borrowing (`12 lakh crore at 68.9% of total borrowings) is the dominant
financing mode. The NSSF constitutes around 26% of the total borrowings (Table 2, p 21).
The deficit incurred through off-budget borrowings through public sector enterprises can
be captured better through the construction of “Public Sector Borrowing Requirement”
(PSBR) data. However, the Union Budget 2021 has not introduced this new deficit concept
of PSBR. Instead, the details of such extra budget borrowings are still kept in an annexure
in the union budget document.
In the Union Budget 2021, creating fiscal space for an economic stimulus package
was a matter of concern. In a regime of revenue uncertainties, the Union Budget 2021
announced the asset monetisation programme, to generate revenue proceeds. The
revenue shortfalls of tax and non-tax revenue are significant (Table 3, p 21). The
disaggregate analysis shows that the fiscal slippage from the disinvestment proceeds is
the highest. In other words, the “fiscal marksmanship” ratio (BE to RE ratio) is highest for
disinvestment proceeds (last column of Table 3). Though asset sale is perceived as the
prominent source of fiscal proceeds, it constitutes only around 5% of the entire receipts
budget.
Less - State’s 650678 784181 549959 665563 24.27 25.34 15.86 19.51 1.43
share
1a Centre’s Net 1356902 1635909 1344501 1545397 50.60 52.85 38.77 45.29 1.22
Tax Revenue
2. Non-Tax 327157 385017 210653 243028 12.20 12.44 6.07 7.12 1.83
Revenue
Interest receipts 12349 11042 14005 11541 0.46 0.36 0.40 0.34 0.79
Dividends and 186132 155396 96544 103538 6.94 5.02 2.78 3.03 1.61
Profits
External Grants 373 812 1422 747 0.01 0.03 0.04 0.02 0.57
Other Non Tax 126540 215465 96602 124671 4.72 6.96 2.79 3.65 2.23
Revenue
Receipts of Union 1762 2303 2081 2531 0.07 0.07 0.06 0.07 1.11
Territories
Total- Revenue 1684059 2020926 1555153 1788424 62.81 65.29 44.85 52.42 1.30
Receipts (1a + 2)
0.00 0.00 0.00 0.00
Economic Stimulus
The economic stimulus packages have two components. One focuses on measures
that relate to instantaneous economic firefighting and the other pertains to long-term
policy imperatives. On the monetary policy front, the Reserve Bank of India (RBI) has
done the heavy lifting through five consecutive lowering of the repo rate adding to a total
of 135 basis points from February to October 2019, along with liquidity infusion
programmes (Thomas and Chakraborty 2021). However, the monetary-fiscal linkages are
crucial to catalyse demand.
Stiglitz and Rashid (2020) pointed out that “today’s excess liquidity may carry a
high social cost. Beyond the usual fears about debt and inflation, there is also good reason
to worry that the excess cash in banks will be funneled toward financial speculation,” and
they warned that this could lead to a “climate of increased (economic) uncertainty” and
end up “discouraging both consumption and the investment needed to drive the
recovery.” This could lead us into a “liquidity trap” with a huge increase in the supply of
money and not much to show for use of it by businesses and households (Chakraborty
and Harikrishnan 2020).
In India, with a policy repo rate at 4%, the RBI has retained the status quo (RBI
2021). The Consumer Price Index (CPI) inflation, after crossing 7%, has led to a negative
rate of interest in India. However, the CPI inflation has cooled off to 4.6% in December
2020. The New Monetary Framework (NMF)—the agreement between the RBI and the
union government in February 2016 adopting inflation targeting—will be reviewed in
March 2021. When monetary policy stance has limitations, through its liquidity infusion
programmes and policy rate adjustments, in triggering growth, the fiscal dominance is
crucial for economic recovery. The economies which rebounded fast, ex post global
financial crisis, were the ones which resorted to significant fiscal stimulus.
In the Union Budget 2021, the fiscal stimulus was announced as “targeted”
economic packages, especially in capital infrastructure investment. There is an increasing
recognition of the fact that public investment has suffered from fiscal consolidation when
the national and subnational governments have over-adjusted to the fiscal rules by capital
expenditure compression. Empirical evidence suggest that public investment is one of the
The total size of the budget for FY2021 has increased to `34.50 lakh crore. In
FY2022, total expenditure is pegged at `35 lakh crore. Out of total spending by the central
government, 10% constitutes defence, while 23% constitutes interest payments (Table 4,
p 22). The food subsidy is 12.25% of total central government revenue expenditure in
2021 RE, as compared to only 3.80% in 2020 BE. In agriculture, education, energy, and
home affairs, the fiscal slippage numbers above one reveal that RE is less than BE.
Intertemporally, the budget credibility analysis of macro-fiscal variables at national and
subnational government levels revealed that the reasons for fiscal forecasting errors can
be bias, variation or random (Chakraborty et al 2020).
Scientific 27367 30023 22352 30640 1.02 0.99 0.65 0.88 1.34
Departments
Social Welfare 44649 53876 39629 48460 1.66 1.77 1.15 1.39 1.36
Tax 169331 152962 147728 131100 6.30 5.03 4.28 3.76 1.04
Administratio
n
of which 153910 135368 106317 100000 5.73 4.45 3.08 2.87 1.27
Transfer to
GST
Compensation
Fund
Transfer to 148907 200447 207001 293302 5.54 6.59 6.00 8.42 0.97
States
Transport 153437 169637 218622 233083 5.71 5.58 6.34 6.69 0.78
Union 15128 52864 51282 53026 0.56 1.74 1.49 1.52 1.03
Territories
Urban 42054 50040 46791 54581 1.57 1.64 1.36 1.57 1.07
Development
Grand Total 2686330 3042230 3450305 348323 100.00 100.00 100.00 100.00 0.88
6
Source: Government of India (2021), (Basic Data), Union Budget documents
The finance minister has announced a new centrally sponsored scheme (CSS) for
enhancing public health infrastructure—Prime Minister Atma Nirbhar Swasth Bharat
Yojana—with an outlay of `64,180 crore over the next six years. However, the finance
minister has also announced a plausible convergence of CSS, as recommended by the
Fifteenth Finance Commission report, which was tabled in Parliament on 1 February
2021. This transition in the structure of intergovernmental fiscal transfers from
conditional grants to formula-based (tax transfers) unconditional transfers (which is 41%
of tax pool as recommended by the Fifteenth Finance Commission) is welcome. The
unconditional transfers provide greater fiscal autonomy to state governments. The
disaggregate analysis also shows that there is no increased centralisation in the design of
fiscal transfers in India with conditional grants constituting only 22.96% (BE 2021–22)
of the total transfers in India.
As per the 2020–21 RE, the tax transfer share (41.86%), goods and services tax
(GST) compensation (8.39%), finance commission grants, including the local body grants
and revenue deficit grants (13.88%) and CSS (23.99%) are the significant components of
intergovernmental fiscal transfers to the states in India (Table 5, p 23). The remaining 4%
is the intergovernmental fiscal transfers to the union territories, including Delhi, Jammu
and Kashmir and Puducherry.
Conclusions
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