Is India Exhausting its Fiscal Space?

The 100th Budget of India made against unusually excruciating circumstances attempted to utilize all the possible firepower to propel the economy.

This year’s budget which seeks to set the growth path for the economy for the next 2-3 years is a much tight and narrower policy ropewalk with high Fiscal Deficit numbers.Fiscal Deficit is the difference between total revenue and total expenditure of the government.

The fiscal deficit target for the 2020-21 F.Y is pegged at 9.5%, much above the Fiscal Responsibility and Budgetary Management (FFBM) Act target of 3% and the analysts’ expectations of 7 %.The target for Fiscal Year 2021-22 is set at 6.8% with a glide path to 4.5 % by 2025-26 which is indicative of the fact that India plans to consolidate its fiscal position in the medium-term only gradually. This, however, can be quite adversely consequential from a macroeconomic perspective.

While India’s approach to fiscal spending is understandable giventhe criticality of stimulus to keep the economy afloat, alive, and in animal spirits and India may not be the only country to do so, however, India’s position becomes vulnerable vis-a-vis other countries are given its high public debt burden.

At 90% of GDP, the public debt ratio has been on the much higher side for India even before the virus outbreak happened as compared to 53 % for the countries that have the same credit ratings by Fitch as India (BBB).

Additionally, with disinvesting of quite a few of the strategic public sector assets and an already high fiscal deficit, India runs the risk of having narrow fiscal space and very little of its conventional ammunition if another crisis strikes in the next half a decade before we can streamline our fiscal position. At the same time, the high Fiscal Deficit also threatens to dent the credibility and ability of RBI to maintain inflation stability.

While we can prioritize our domestic concerns and let down the fiscal guard and not worry too much about the international credit ratings, nevertheless for the growth path to be sustainable in long term, fiscal support must be accompanied by macroeconomic stability and institutional credibility.