COVID-19 and economic divergence

In its February 2020 G-20 Surveillance Note, the IMF notes that a global recovery hinges on making rapid progress against the pandemic and maintaining effective economic support until the virus is defeated. In addition to substantial income and liquidity support by advance economies plus secured access to vaccines, the divergence among advanced and EMDEs is already striking: over 50% of emerging market and developing economies that were converging toward advanced economies (in terms of GDP per capita) are now expected to diverge during 2020-22. 

While rich countries are securing vaccine supplies or commitment for future supplies and have deployed large fiscal and monetary measures, poor countries that have little fiscal space are grappling to secure access to vaccines. They need support to prevent setback in development gains, to maintain access to food and healthcare, and to invest in climate resilience and digital infrastructure. 

To durably end the pandemic, global cooperation is important, including in meeting the financing needs for COVAX facility so that several emerging market and developing economies have access to vaccines in an equitable manner. Well-targeted fiscal and liquidity lifelines and monetary policy support are essential until constraints are eased meaningfully. However, macroprudential tools should be used to contain rising financial risks.  

Some of the concerning issues outlined in the note are as follows:

• Inequalities are deepening, vulnerabilities are building, and economic potential is affected. For instance, the most vulnerable people have been hit hard with respect to loss of employment, and access to education and health services. Among those hit hard are young, low-skilled, women and informal sector workers. About 90 million people are expected to fall into extreme poverty during 2020-21. Prolonged unemployment could erode skills and learning gaps may widen due to lack of access to online learning. 
• Many businesses will have substantially higher debt as they exit the pandemic, and once liquidity and regulatory forbearance lifelines are withdrawn, bankruptcies are likely to rise. Meanwhile, the crisis is eroding bank capital buffers and increasing pockets of pre-existing vulnerabilities in the non-bank financial sector.
• Higher public debt could constraints government response to react to future downturns and also crowd out investment if the differential between interest rate and growth turns less favorable. 
• Growth outlook remains uncertain. A faster-than-projected immunization could lead to ¾ percent higher global output in 2021, with benefits mostly concentrated in advanced economies. If infections accelerate through 2021 and vaccination efforts go less smoothly than currently anticipated, global output could fall ¾ percent below the 2021 baseline, with losses concentrated in advanced economies. 
• More intense and frequent weather-related disasters could amplify economic difficulties and social instability in vulnerable regions, triggering migration to the rest of the world. 

The IMF argues that a global recovery relies on global leadership by the G-20. Some of the key highlights are as follows:

• Ensure vaccination is widely available to end the pandemic everywhere. Virus could mutate and new variants could spread if everyone is not covered in the vaccination drive. Many advanced economies have procured enough supplies to more than cover their population, but many poorer economies are struggling to procure enough. G-20 must ensure that low- and middle-income economies get access to safe and effective vaccines, including boosting funding for COVAX facility, assist in funding logistics for vaccine delivery, and assisting in treatments, therapies, and tests to contain outbreaks. 
• Monetary policy should remain accommodative in most economies because economic disruptions are ongoing, unemployment is high, and inflation expectations remain subdued. Employing macroprudential tools to address risk to financial vulnerabilities while maintaining monetary policy measures to support growth are essential in the medium-term. Access to bilateral central bank swap lines can help to maintain access to liquidity and financial stability in some economies. However, for economies facing high inflationary pressures, some withdrawal of monetary support may be warranted. Uneven global recovery may mean unintended spillovers as some country being to withdraw policy support. In this situation, clear communication by central banks in advanced economies and strong policy frameworks in emerging market economies may be helpful.
• With unemployment still high, it is important to maintain fiscal support where possible (if fiscal space allows) to help the economy return to pre-existing income trends faster. In economies where vaccine may not be widely available and fiscal space is constrained, careful targeting of support to the most vulnerable, including reallocation of spending within the budget envelope, may be a viable option. It is important to avoid undue bankruptcies that could deteriorate employment losses. A credible medium-term fiscal framework that balances the need for short-term support against medium-term fiscal sustainability is needed, especially for economies with high debt and risks of increasing financing costs. 
• With increasing vaccination and economic recovery, policy support should be transitioned to cater to the needs of the post-pandemic world. For instance, training and reskilling of unemployment people, investments in healthcare and education, and enhanced social protections will be helpful. For businesses, support should prioritize viable firms, restructuring and efficient out-of-court settlements and bankruptcy procedures so that resources and capabilities are not lost or left idle. 
• Ensure a strong, green, and inclusive recovery. First, increase public infrastructure investment focusing on greening the economy to boost demand and strengthen resilience. Global economic boost is high during a time of economic slack if economies synchronize their spending while monetary policy remain accommodative. Agreement on mechanism to price externalities will be helpful, particularly forward guidance for phased-in, steadily rising carbon prices to meet emissions targets. Carbon pricing could be a part of a strategy to restore stronger fiscal finances. 
• Promoting investment in the digital economy will help limit human capital erosion and strengthen inclusion. Ensuring widely accessible broadband internet helps to expand government service provision, facilitate remote learning, and create options for firms to expand their customer base. Digitization also helps to strengthen financial inclusion, and support convergence. Complementary reforms to ease barriers to entry can help strengthen innovation and investment. 

Indian economy to grow by 0.4% in Q3 FY2021 but contract by 8% in FY2021

According to the latest estimates released by NSO, the Indian economy grew y-o-y by 0.4% in the third quarter of FY2021 (October to December 2020) after contracting by 24.4% and 7.3% in the first and second quarters, respectively. GVA growth was 1.0%. It indicates a gradual recovery upon unlocking of the economy following severe disruptions to economic activities and livelihoods due to the COVID-19 pandemic. The economy grew by 3.3% in Q3FY2020. 

While agriculture and industry sectors are projected to grow (y-o-y) by 3.9% and 2.7%, services sector is projected to contract by 1%. A bountiful harvest due to favorable monsoon and availability of agricultural inputs including abundant labor force that reverse migrated to the villages after the lockdowns contributed to the strong agricultural sector performance. In fact, rice output grew by 2% in Q3 FY2021 compared to 0.1% in the corresponding quarter in FY2020. 

Industrial activities began to recover after five successive quarters of negative growth starting Q2FY2020. Within industry sector, mining and quarrying contracted by 5.9%, but manufacturing, electricity and other utilities, and construction activities continued recovery. The corresponding IIP data for industry sector show that mining contracted y-o-y by 4.4% and metallic minerals by 15.9%. However, manufacturing and electricity grew by 1.2% and 6.7%, respectively. That said, the cumulative data up to the third quarter show that all IIP broad sectors actually contracted in FY2021 compared to FY2020.  

Within services sector, while financial, real estate and professional services recovered trade, hotels, transport, communication, and public administration and defense activities continued on contractionary trend. Travel and tourism industry still continues to be affected by the pandemic-related restrictions and consumer apprehension.

On the demand side, private consumption growth remains strong but public consumption growth is moderating. Gross fixed investment grew at a solid pace of 33.0% y-o-y compared to 32.3% in Q3FY2020. Exports of goods and services grew by 21.2% but imports decreased by 0.8%. So, it is strong private consumption and investment, partly assisted by the fiscal stimulus and subsidies provided by the government, that is driving growth. This is reflected in the supply-side data as strong agricultural sector growth and recovery of industrial sector activities. 

The NSO also released second advance estimates, which show notable revisions in the benchmark estimates released in the first advance estimates. The extrapolation is based on information available during the first nine months of the fiscal year. It shows that the economy will likely contract by 8.0% in FY2021, steeper than in the first advance estimate. The economy is expected to grow by 4.0% in FY2020.

While agriculture sector is expected to grow by 3.0% in FY2021, industry and services sectors are expected to contract by 8.2% and 8.1%, respectively. Except for electricity and other utilities, other sub-sectors in industry sector are expected to contract sharply (over 8%). The disruption to travel and tourism activities is expected to contract trade, hotels, transport and communications activities by 18.0%.  

INR 2.5 lakh crore (INR 2.5 trillion) from asset monetization target in India

As announced by the finance minister in the FY2022 budget speech, the Indian government is aiming to monetize 100 government-owned assets across sectors to mobilize about INR 2.5 trillion, which will be crucial to meet the overall revenue target. This is part of a National Asset Monetization pipeline. Excerpts from a news report in The Times of India. 

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Reiterating his strong backing for privatisation and asset monetisation, the PM said the reforms, which have been launched, were aimed at ensuring that public money is spent judiciously to benefit the poor, in what was seen as a response to critics of the new policy unveiled in the Budget.

“The money that belongs to the poor is used for such enterprises (PSUs). This puts a huge burden on the economy,” Modi told a webinar to draw up the roadmap for the implementation of Budget proposals on privatisation and asset monetisation.

He said the government does not have to keep running public sector enterprises just because they have been running for decades or they were “pet projects of somebody”.

[…]Since coming to power in 2014, the NDA government has talked about the sale of PSUs, especially loss-making ones, such as Air India, but it has a poor track record. It sought to pass off the sale of state-run entities, such as HPCL to ONGC, another PSU, as strategic sale, drawing criticism even from the CAG.

It is now trying to push it as a key reform initiative and has even added state-run banks and a general insurance company to the list, after specifying that only four strategic sectors — atomic energy, space and defence, transport and telecom, power and petroleum — will have PSUs. Even in the sectors, state-run firms can have a diminished presence.

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The finance minister committed, in her budget speech, that the government will bring down fiscal deficit to 4.5% of GDP by FY2026, largely by increasing buoyancy of tax revenue through improved compliance, and increased receipts from assets monetization (including public sector enterprises and land).

In FY2022 alone, divestment receipts (which are a part of capital receipts) of INR 1.8 trillion is planned. Divestment targets have been missed in the past. For instance, the government could not meet the divestment target in FY2020 (INR 0.5 trillion vs INR 1.05 trillion targeted) and FY2021 (INR 0.32 trillion vs INR 2.1 trillion targeted). Note that for FY2022, planned divestment receipts account for 5% of total revenue receipts and 10.3% of capital receipts.

Key highlights of Nepal's 15th five-year plan (FY2020-FY2024)

National Planning Commission recently published the 15th five-year plan (FY2020-FY2024) taking also into account the effect of COVID-19 pandemic on the government’s priorities and the economy. This plan is considered as a first phase of a 25-year long-term economic vision that aims to position Nepal as a high-income country with per capita income of USD 12,100 by FY2044.  Its theme is 'generating prosperity and happiness' and aims to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth. 

The government is expecting Nepal to graduate from LDC category to a developing country status within this plan (by 2022 with per capita income of USD 1,400). This plan is expected to contribute to efforts to ensure that Nepal reaches a middle-income country status by FY2030 (with per capita income of USD 2,900) and achieve the SDGs as well. By the end of FY2024, per capita income is estimated to reach USD 1,595.

The plan emphasizes boosting investment in the sectors or thematic issues that are considered as drivers of economic transformation. These include transport, ICT, energy, education and healthcare, tourism, commercialization of agriculture and forest products, urbanization, social protection, subnational economy, and good governance, among others.

 By FY2024, the government wants to achieve a double-digit growth rate, increase per capita income of USD 1,595, reduce population under absolute poverty line to 9.5%, and increase share of formal sector employment to 50%. 

Some of the major national targets for 15th five-year plan (FY2020-FY2024) are as follows:

• Average GDP growth (at basic prices): 9.6%
• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15.7%
• Share of essential goods (agri, livestock, food items) in total imports: 5%
• Population under the absolute poverty line: 9.5%
• Population with multidimensional poverty: 11.5%
• Share of formal sector employment: 50%
• Unregistered (formal) establishment: 10% of total establishment
• Literacy rate (15+ years): 95%
• Road density: 0.74 km of road per sq km of land
• Households with access to electricity: 95%
• Population with access to internet: 80%
• Electricity generation (installed capacity): 5,820 MW
• Renewable energy: 12% of total energy consumption
• Per capita electricity consumption: 700 kwh
• Agricultural productivity (major crops): 4 MT per hectare
• Irrigable land with year-round access to irrigation: 50%
• Per capita tourist spending: USD 100 per day
• Human development index: 0.624
• Gender development index: 0.963
• Population covered by basic social security: 60%
• Social security expenditure: 13.7% of budget
• Global competitiveness index: 60
• Ease of doing business index: 68
• Travel and tourism competitiveness index: 3.8
• Corruption perception index: 98
• Nepali citizens with national ID card: 100%
• Population affected by disaster incidents: 9.8%

The NPC estimated average growth in agriculture, industry, and services sectors to be 5.4%, 14.6%, and 9.9%, respectively. By the end of the 15th plan, the government is targeting to increase the share of industry and services sectors to 18.8% and 58.9%, respectively, while the share of agriculture sector is to decrease to 22.3%. To achieve the stated average growth rate, the NPC estimated that NRs 9.229 trillion (at FY2019 constant prices and based on ICOR of 4.9:1; FYI, a lower ICOR indicates efficient production process) investment will be required over the plan period. Public, private and cooperative sectors are expected to contribute 39%, 55.6%, and 5.4%, respectively of this required investment.  

[The government is considering FY2019 as a base year for the long-term economic vision. So, the data is presented in FY2019 constant prices. However, this is not much helpful in doing comparative analysis including that of long-term plans and targets. National account estimates, public finance, and periodic surveys - based on which the numbers are estimated eventually- are either presented with different year as base year (FY2011 for NEA for now) or are in current prices (fiscal, monetary, external sectors, and household surveys.]

As a share of GDP by FY2024, the expected impact on macroeconomic indicators are as follows:

National accounts (focused on increasing investment through savings mobilization)

• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15%
• Gross domestic savings: 22%
• Gross national savings: 47.5%
• Gross fixed capital formation: 41.6%

Fiscal sector (focused on allocation and implementation efficiency, and fiscal discipline for expenditure management; maximize revenue mobilization and taxpayer-friendly tax administration)

• Total budget: 43.3%
• Recurrent expenditure: 17.9%
• Capital expenditure: 18.6%
• Financial management: 6.8%
• Revenue: 30%
• Income tax: 10%
• Foreign debt: 5.7%
• Domestic borrowing: 4.3%

Monetary and external sector (focused on controlling inflation, balance of payments stability, and financial stability)

• Average annual Inflation: 6%
• Export of goods and services: 15%
• Import of goods and services: 49%
• Remittances: 22.1%
• Foreign investment: 3%

Meanwhile, the average financing gap to achieve the SDGs is estimated to be NRs 585 billion per year for the entire period of 2016 to 2030 (SDG period). It is on average 8.8% of GDP for 2016-19, 12.3% of GDP for 2020-22, 13% of GDP for 2023-25, and 16.4% of GDP for 2026-30. The overall annual financing gap is estimated at 12.8% of GDP throughout the period of 2016 to 2030.

Key highlights of Nepal's long-term economic vision (FY2020-FY2044)

According to a press note by National Planning Commission, the government is aiming to graduate Nepal from LDC category (to a developing country status) by FY2022 with per capita income of USD 1,400 and a middle-income country by FY2030 (according to WB classification, Nepal is now in the lower middle-income country category). In FY2019, which is considered as base year for the long-term vision, per capita income was USD 1,047. 

Furthermore, by FY2044, the national goal is to achieve a high-income country category with per capital income of USD 12,100. To be fair, these are actually adapted from long-term development vision published by the government in 2018. They are also in the recently published the 15th Five Year Plan (FY2020-FY2024). 

Three phases of long-term economic development vision (Prosperous Nepal, Happy Nepali) are:

• Generating prosperity and happiness (15th five-year plan, FY2020-FY2024), which aim to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth.
• Accelerating prosperity and happiness, and achieving SDGs (16th and 17th five-year plan), which aim to rapidly achieve the indicators of prosperity and happiness. By the end of 17th five-year plan (FY2034) Nepal will have graduated to a middle-income country with a goal to high-income status.
• Sustaining prosperity and happiness (18th and 19th five-year plan), which aim to achieve sustainability by maintaining balance between prosperity and happiness. Social justice and double-digit economic growth on average are to be achieved during this period. By the end of this phase (FY2044), the economy will be self-reliant, independent, and prosperous. 

It outlines 10 national goals and 76 indicators for long-term economic development vision. It also identifies 8 strategic national strategies, 9 drivers of economic transformation, and 8 enablers. 

The ten long-term national goals are:

1. Accessible and modern infrastructure and connectivity
2. Development and full utilization of human capital potential
3. High and sustainable production and productivity
4. High and equitable national income
5. Well-being and decent standard of living
6. Safe, civilized and just society
7. Healthy and balanced ecology
8. Good governance
9. Comprehensive democracy
10. National unity, security and dignity

The eight long-term national strategies are:

1. Achieve rapid, sustainable and employment-oriented economic growth
2. Ensure affordable and quality health care and education
3. Develop internal and international interconnectivity and sustainable cities/settlements
4. Increase production and productivity
5. Provide a comprehensive, sustainable and productive social security and protection
6. Build a just society characterized by poverty alleviation and socio-economic equality
7. Conserve and utilize natural resources and improve resilience
8. Strengthen public services, enhance balanced provincial development, and promote national unity

The nine drivers of economic transformation are:

1. High-quality and integrated transport system, information technology and communication infrastructure, and massive networking
2. Quality human capital and entrepreneurial work culture and full utilization of potential
3. Hydroelectricity production and promotion of green economy
4. Increase in production, productivity, and competitiveness
5. Development and expansion of quality tourism services
6. Modern, sustainable and systematic urbanization, housing and settlement development
7. Development and strengthening of the provincial and local economy and expansion of the formal sector
8. Guaranteed social protection and social security
9. Governance reform and good governance

The eight enablers that will provide support for the realization of drivers of economic transformation are:

1. Political commitment to the constitution, democracy, and development
2. Demographic dividends and civic awareness
3. Geographic location as well as natural diversity and abundance of natural resources
4. Socio-cultural diversity and unique identity
5. Social capital and Nepali diaspora spread around the world
6. Clean and renewable energy
7. Goodwill of friendly nations and the international community
8. Federal governance and fiscal federalism

The overall structural strategy over the next 25 years is to reduce share of agriculture sector in GDP to 9%, but increase share of  agriculture and services sectors to 30% and 61%, respectively. The annual average GDP growth target of 10.5% is set for the period. A summary of the targets (which may be reviewed in subsequent plans) to be achieved by FY2044 are as follows:

• Average annual GDP growth: 10.5%
• Per capita income: USD 12,100
• Population under absolute poverty line: 0 (or below 1%)
• Population in MPI: 3%
• Gini coefficient based on property: 0.25
• Ratio of richest 10% and poorest 10% population (Palma ratio): 1.1
• LFPR (15+ years): 72%
• Share of formal sector employment: 70%
• Electricity generation (installed capacity): 40,000 MW
• Households with access to electricity: 100%
• Per capita electricity consumption: 3,500 kilowatt-hours
• Households with access to motor transport within 30 minutes of travel: 99%
• National and provincial highways (black topped up to two lanes): 33,000 kms
• National highways (>two lanes and fast tracks): 3,000 kms
• Railroads: 2,200 kms
• Population with access to internet: 100%
• Life expectancy at birth: 80 years
• Maternal mortality (per 100,000 live births): 20
• Child mortality rate (per 1000  live births): 8
• Underweight children: 2%
• Literacy rate (15+ years): 99%
• Net enrolment rate at secondary level (9-12): 95%
• Gross enrolment rate at higher education: 40%
• Population with access to improved drinking water: 96%
• Population covered by basic social security: 100%
• Gender development index: 0.99
• Human development index: 0.760

Quick overview of India's FY2022 budget

Finance Minister Nirmala Sitharaman presented INR 34.8 trillion expenditure plan [USD 476.8 billion, USD 1 = INR 73.05 as on Feb 1) for FY2022 (starts 01 April 2021). It is 1.0% increase over the revised expenditure estimate for FY2021. Revenue growth is expected to be 23.4% (15% if we consider revenue plus recovery of loans & divestment receipts).

FY2022 budget focuses on six pillars: 

1. Health and wellbeing (PM Aatmanirbhar Swastha Bharat Yojana to develop capacities of primary, secondary and tertiary healthcare system, strengthen existing institutions and rollout COVID-19 vaccine, among others)
2. Physical and financial capital, and infrastructure (ANB production linked incentive scheme to promote manufacturing activities, mega investment textiles parks, National Infrastructure Pipeline, recapitalization of PSBs, infrastructure financing through Development Financial Institution, national asset monetization pipeline of potential brownfield infrastructure assets; roads, highways and railway infrastructure with focus on corridors; development of world class Fin-tech hub at GIFT-IFSC; divestment of strategic assets such as BPLC, Air India, SCI, CCI, IDBI Bank, etc)
3. Inclusive development for aspirational India (focus on agriculture and allied sectors, farmers' welfare and rural India, migrant workers and labor, and financial inclusion incl MSME)
4. Reinvigorating human capital (proposed Higher Education Commission of India that will set standard, accredit, regulate and fund higher education; benchmark skill qualifications, assessment, and certification, accompanied by the deployment of certified workforce)
5. Innovation and R&D (national research foundation, language translation mission, a space PSU, etc)
6. Minimum government and maximum governance (bill to regulate healthcare professions, first digital Census, etc)

The thrust is on Aatmnirbhar Bharat (Self-reliant India) initiative, for which it has rolled out sectoral incentives (such a production linked incentives to spur industrial activities), increase in custom duties on certain items, and sectoral reforms. 

Expenditure: Revised total expenditure for FY2021 is estimated to be 113.4% of budgetary estimate for FY2021 as pandemic-related expenditure on providing relief increased. For FY2022, about 84.1% of total expenditure outlay of INR 34.8 trillion consists of revenue expenditure (recurrent expenditure) and the rest 15.9% is capital budget. About 23.2% of the revenue expenditure consists of interest payments, 10% for defense, 9.9% for transfer to states and UTs, and 9.6% for subsidy. Interest payment alone is expected to be 45.3% of total revenue (tax and non-tax revenue).

The budgeted expenditure for FY2022 is equivalent to about 15.6% of GDP (per government’s estimate of nominal GDP for FY2022). Revenue expenditure is estimated to be 13.1% of GDP and capital expenditure 2.5% of GDP. Food, fertilizer and petroleum subsidies (interest subsidy is excluded in expenditure reporting in the budget) together is equivalent to about 1.5% of GDP, of which 72% is food subsidy and 24% fertilizer subsidy. Interest payments is estimated to be 3.6% of GDP. The government is hoping that interest payments will come down in the medium-term with RBI’s accommodative monetary policy and adequate liquidity in the market. 

The expenditure outlay for health sector is down by 9.5% compared to FY2021 revised estimate. It grew by 30% in FY2021 compared to FY2020, reflecting the spike in healthcare expenditure to contain the pandemic. Similarly, allocations for rural development, which includes NREGA, is down 10% compared to 51.9% growth in FY2021.  

In addition to INR 34.8 trillion expenditure outlay, the government is also expecting capital investment of INR 5.8 trillion from various public enterprises, resulting in total expenditure outlay of about INR 40.7 trillion. In FY2021, the union government’s expenditure was INR 34.5 trillion and public enterprises spent INR 6.5 trillion in capex, making total expenditure of INR 41 trillion. So, total capital spending of the central government (incl PSUs capex) could be as high as 5.1% of GDP.

Revenue: As per the revised estimates for FY2021, the government expects to mobilize 77% of the tax and non-tax revenue outlined in the FY2021 budget. While tax revenue is expected to be 82.2% of target, non-tax revenue is expected to be just 54.7% of the target. Capital receipts are expected to be 185.6% of budget target, thanks to a massive borrowing after the lockdowns. 

In FY2022, the government is expecting to mobilize INR 17.9 trillion revenue, of which 86.4% is tax revenue and the rest 13.6% is non-tax revenue— similar to the revised estimate for FY2021. The government wants to mobilize INR 1.9 trillion in the form of non-debt creating capital receipts (recovery of loans and divestment receipts). A substantial part of it consists of divestment receipts (INR 1.8 trillion). Divestment targets have been missed in the past. For instance, the government could not meet the divestment target in FY2020 (INR 0.5 trillion vs INR 1.05 trillion targeted) and FY2021 (INR 0.32 trillion vs INR 2.1 trillion targeted). 

The projected revenue is estimated to be 8.9% of GDP (6.9% tax revenue, 1.1% non-tax revenue and 0.9% non-debt creating capital receipts), which is higher than 8.2% revised revenue estimate in FY2021. Note that non-debt creating receipt is estimated to be about 0.84% of GDP, much higher than 0.24% of GDP last year. This is primarily due to a large divestment target (about 0.79% of GDP, up from 0.16% of GDP in FY2021). 

Of the total gross revenue to be mobilized by the center (including transfer to NCCF/NDRF and state’s share), GST accounts for 21.8%, income tax 19.4% and corporation tax 18.9%.

Fiscal deficit: The projected expenditure and revenue including recovery of loans and divestment receipts leaves a budget gap of about INR15.1 trillion for FY2022 (6.8% of GDP). The government wants to finance this fiscal deficit by borrowing and using other resources (including drawdown of cash balance). Specifically, it is planning to borrow almost all of it from the internal market. Specifically, about 64.3% of it will be in the form of market borrowing (dated government securities and T-bills) and the rest from securities against small savings, state provident funds and other receipts including 364-day treasury bills and net impact of switching-off of securities. External borrowing is estimated to be about INR46.2 billion (0.01% of GDP).

For FY2022, projected revenue deficit is 5.1% of GDP, fiscal deficit 6.8% of GDP, and primary deficit 3.1% of GDP. In FY2021, the estimated revenue deficit is 7.1% of GDP, fiscal deficit 9.5% of GDP and primary deficit 5.9% of GDP. 

The reduction in deficit targets primary hinges on the ability of the government to accomplish its divestment target. Divestment of government-held assets is kind of one-off revenue bonanza. Relying on divestment alone to lower fiscal deficit is not going to be sustainable. The government is planning to divest assets in several PSUs (such as Air India, LIC, etc). It is expected to be around 0.79% of GDP, up from 0.16% of GDP in FY2021. The plan for big ticket divestment has been dragging on for a long time. 

However, if nominal GDP growth accelerates (more infrastructure investment funding by divesting government-owned assets), then revenue mobilization will also pick up and fiscal deficit could be narrowed. Fiscal Responsibility and Budget Management (FRBM) Act 2018 sets fiscal deficit target at 3% of GDP by FY2021 and central government debt at 40% of GDP by FY2025. The government will amend FRBM Act as it will not be able to bring fiscal deficit to the level stipulated in the existing version of FRBM Act. The finance minister committed, in her budget speech, that the government will bring down fiscal deficit to 4.5% of GDP by FY2026, largely by increasing buoyancy of tax revenue through improved compliance, and increased receipts from assets monetization (including public sector enterprises and land). States are allowed to borrow more next year but will have to lower net fiscal deficit to 3% of GSDP by FY2024. 

Starting this budget document, the government will discontinue NSSF Loan to FCI for food subsidy and that it will be provisioned directly in the budget. This applies to FY2021 revised estimate and FY2022 budget estimate. This move improves budget transparency as substantial subsidy related extra budgetary resources were complicating true extent of government borrowing and level of fiscal deficit. In fact, in FY2020 budget, the FM released data on extra budgetary resources, especially borrowings of government agencies that went towards funding GOI schemes and the repayment was the government's burden. In FY2021 budget, the FM extended its scope and coverage to include NSSF loans provided by the government to the FCI. This is now discontinued. 

The stimulus measures (Self-reliant India initiatives such as production-linked incentives for 13 key sectors, increase in customs duty to encourage Make in India, increase net borrowing limit for states by 4.0% of GSDP for FY2022 and it could be conditionally increased by 0.5% of GSDP, capex increase, and RBI accommodative measures) and rapid vaccination program are expected to support economic recovery. Some of the rating agencies are okay with the high fiscal deficit along with a realistic (or even conservative) revenue projection. 

Concerns over fiscal/debt sustainability and sovereign ratings have been sidelined in favor of higher expenditure to support economic activities. The fiscal situation will be okay as long as GDP growth rate is higher than interest rates on government bonds. Already interest payment by central government is about a quarter of total spending and 45% of total revenue. Higher the borrowing by the government, the higher will be interest payments. It is important that higher borrowing goes into creating productive assets so that the return is more than enough to pay off debt.