Avoid Sharp Fiscal Tightening In FY2022: ICRA

In FY2022, sharp fiscal tightening should be avoided by both the Centre and the state governments as it would temper the much-awaited economic recovery, said ICRA Principal Economist Aditi Nayar. A revenue def

BY Realty Plus
Published - Saturday, 23 Jan, 2021

Avoid Sharp Fiscal Tightening In FY2022: ICRA

In FY2022, sharp fiscal tightening should be avoided by both the Centre and the state governments as it would temper the much-awaited economic recovery, said ICRA Principal Economist Aditi Nayar. A revenue deficit of 3.5 percent of GDP and a fiscal deficit of around 5 percent of GDP for the Government of India may allow enough space for prioritising health expenditure, vaccine rollout as well as capital spending, based on the revenue rebound that is widely expected in FY2022. Given the continuing uncertainty, tax changes should be avoided at this juncture, in our view, and the focus should instead be on maximising disinvestment proceeds, Nayar said. The Fifteenth Finance Commission’s recommendations on revenue sharing and fiscal deficit targets, the borrowing permission to be granted by the GoI, and the extent of improvement that can be realised in their own tax revenues, will guide state fiscal trends in FY2022, she observed. A fiscal deficit target of 3.5 percent of gross state domestic product (GSDP) for the state governments for FY2022, may allow them to prioritise a portion of the capital expenditure that had to be deferred during the pandemic, and provide some funds towards projects under the National Infrastructure Pipeline (NIP). With the GoI’s fiscal deficit pegged at Rs. 11.1 trillion in FY2022, we expect net G-sec issuance to be placed at Rs 9 trillion. Assuming that 90 percent of the states’ estimated fiscal deficit of Rs 7.8 trillion is funded by state development loans, net issuance of Rs 7 trillion, resulting in a total dated market borrowing of Rs. 16 trillion for FY2022 is seen, Nayar concluded.