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Budget’s strategy of fiscal consolidation, compressing expenditure, could prove to be a costly miscalculation

  • calendar 09-Feb-2021
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Budget’s strategy of fiscal consolidation, compressing expenditure, could prove to be a costly miscalculation

This was not an ordinary year. Faced with managing the economic fallout of a once-in-a-century crisis, the expectations from the Union budget were of a completely different order of magnitude. The challenge before the finance minister was how to enhance public spending, without raising taxes, while adopting a credible path for fiscal consolidation. It appears as though expectations of a quicker recovery of the formal economy in 2021-22, and concerns over high debt levels, seem to have persuaded the government not to opt for aggressive spending in the immediate term, but focus on consolidation. This could prove to be a costly miscalculation. The economic outlook isn’t as rosy once the base-effect-induced bounce in growth next year wears off. The roadmap laid out by the 15th Finance Commission indicates this possibility. Nominal GDP growth is expected to slow down from 13.5 per cent in 2021-22 to 9.5 per cent in 2022-23 — implying a real GDP growth of only around 5 per cent.

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