Budget 20-21: Govt must maintain fiscal discipline

There is a buzz that Finance Minister Nirmala Sitharaman may bid adieu to fiscal discipline. Quoting government sources and economists, Reuters reported that the “government is expected to raise spending on infrastructure and cut some personal tax in its 2020/2021 budget, to spur consumer demand and investment.” This would not augur well for the economy, for no country can spend its way out of a slowdown.

With 4.5 per cent growth in the July-September quarter, the unemployment rate at decades high, and few green shoots visible, Sitharaman’s job of presenting Budget is indeed unenviable. Worse, the slowdown seems to be stubborn. The government slashed corporate taxes drastically; the Reserve Bank of India brought down the interest rate by 135 basis points in 2019; but no major investments have come to India.

“Economists and investors say fiscal stimulus in the budget for the year beginning April 1 and an increase in spending on roads, railways and rural welfare could revive growth,” the Reuters report said. Quoting government sources, it went on to say that the Finance Minister “could defer the earlier target of cutting fiscal deficit to 3 per cent of gross domestic product in 2020/21 by at least two years.”

While the more expenditure on roads, railways, and other infrastructure projects would be good, more spending on welfare would be pointless. At any rate, the government should refrain from deferring the target of cutting fiscal deficit to 3 per cent by two years.

We should not forget that India’s political class has observed its promise of fiscal prudence repeatedly and for many years. The Fiscal Responsibility & Budget Management Act, 2003, mandated that the fiscal deficit be brought to 3 per cent and the revenue deficit to zero by March 31, 2008. Even 12 years after the deadline, the former is likely to be in excess of 3.5 per cent and the latter is hovering around 2.3 per cent.

Equally important to remember is the fact that the Narendra Modi government’s record about maintaining fiscal discipline has been better than that of the previsous regime. The fiscal deficit came down from 4.1 per cent in 2014-15 to 3.3 per cent to the current fiscal. Owing to the shortfall in direct taxes (mainly corporate tax) and the goods & services tax, there may be some slippage in the current year, yet this would much below 4.1 per cent. There is no reason why the Modi government should sully smear its own record by increasing the deficit.