Sequestering the fiscal bounty

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When the budget of FY22 was presented on February 1, 2021, the Covid first wave was way behind, and everyone expected the nation to be on a path to economic recovery.

But then came the second wave, which led to another round of lockdowns and dips in economic activity. It also led to increasing tenure of support for people across many sectors. But then came the vaccinations.

With more than three-in-five people fully vaccinated, there was a steady economic rise. But when it seems everything is past, then comes the Omicron variant.

This back and forth between near-complete recovery and pandemic attacks made the FY22 volatile. Its effect is visible in public finances.

That resulted in a fiscal space that is pushed beyond the limits of the FRBM Act. This eased the fiscal constraints of the government.

Thus, the released stimulus is mostly front-loaded, with almost ₹11 lakh crores of fiscal stimulus earmarked for FY22.

The budget estimated the fiscal deficit to be 6.8% of the GDP, which is ₹15.1 lakh crores. But the analyst expects it to fall between ₹13.5 to ₹14 lakh crores.

Further analysis estimates higher fiscal space for the government. Reports even show 6-6.2% of the fiscal deficit-to-GDP ratio. These numbers have created excitement among the analysts as it is rare for India to have such fiscal space as large as this.

Thus, the notional saving for the government is in the gap between the commitment made in the budget (₹15.1 lakh crores) and where the fiscal deficit ends up (₹14 lakh crores). The gap is now ₹1 lakh crores.

The question arises of what to do with this ₹1 lakh crores of fiscal space. It could be used either in a reduction of accumulating debt, lowering taxes or increasing revenue expenditure.

With the increase in the government’s debt-to-GDP ratio, having a lower fiscal deficit can ease the pressure on this ratio.

On the revenue side, the amount can be used to relax further taxes, such as direct taxes on individuals or corporations.

It can also be used for enhancing revenue expenditure. For example, a boost package to any government welfare programs will help the beneficiaries and will help in this pandemic era.

There is another way to spend this fiscal space, which would be on green projects. It will be a long-term investment and will strengthen India’s commitment to COP26.

India has the goal to produce 500 GW of renewable energy by 2070, the Net-Zero year of India. At the same time, the IFC estimates that India will need to invest ₹230 lakh crores ($3.1 trillion) between 2018 to 2030 to achieve the green target.

These investments are needed for developing the renewable energy sector, and for total transitioning into the green.

For that impact capital has to be created, with fiscal space being the token investment that would attract more investors to this transition.

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