GDP: No outlook for medium term, but Centre vows to spend

Given the absence of plausible projections of gross domestic product (GDP) and revenues for FY21, the Centre has decided to not present the customary medium-term expenditure framework (MTEF) in Parliament this year.

However, a finance ministry note warned against the economy being “below its growth potential for long” and stressed the need for governmental expenditure “substituting any slack in aggregate demand” at this juncture.

The MTEF, an obligation under the Fiscal Responsibility and Budget Management (FRBM) Act, is presented every year in Parliament, usually in the Winter Session. It is meant to give a general guidance on the government’s expenditure plans for three years, starting from the year in which it is presented.

However, the actual Budget numbers have, more often than not, significantly varied from MTEF guidance, given the exigencies and economic vicissitudes.
“Assumptions regarding growth rate of the economy and central government tax receipts are the prerequisites for meaningful expenditure projections. It may not be possible to obtain reliable projections of GDP growth at this time due to the continuing impact of Covid-19 pandemic on the Indian economy,” the finance ministry said in a report.

The MTEF Statement 2020, containing expenditure projections for FY22 and FY23 besides an assessment of the same in FY21, was to provide rolling targets of prescribed expenditure indicators. These medium-term (two-year) projections are usually derived by providing a normative increase over the anticipated expenditure of the current year, subject to other factors.

“The expenditure of union government in the medium term is determined partly by the GDP growth as governmental expenditure will have to substitute any slack in aggregate demand from the non-government sector. Determining expenditure based on non-robust GDP estimate has the danger of keeping the economy below its true growth potential. An emerging economy like India cannot afford to be below its growth potential for long,” the government noted.

“This year, on account of Covid-19 pandemic, the base line expenditure estimates may be artificially inflated. For example, it may be difficult to tease out the transient components of Pradhan Mantri Gareeb Kalyan Package and Aatma Nirbhar Bharat Abhiyan Package. Hence, expenditure estimates in T+1 and T+2 years may also be unreasonably high thereby providing an inaccurate fiscal plan and a faulty foundation for upcoming budgets,” it said.

After the revision of the Centre’s borrowing programme, its fiscal deficit for FY21 stands at 5.7% of GDP, against budgeted 3.5%. With net tax receipts declining 40% on year in April-July, analysts see fiscal deficit more than doubling from the budgeted level of Rs 8 lakh crore for FY21. It is not clear at this stage whether the budgeted expenditure of Rs 30.4 lakh crore will actually be exceeded and by how much.

The Centre has recently announced Rs 21-lakh-crore stimulus package in tranches, largely consisting of liquidity measures. The fiscal impact of the stimulus measures were estimated to be about Rs 3 lakh crore. The finance ministry has also cut down spending by various departments by up to 40% in H1FY21, almost matching the fiscal impact of the stimulus. Additional stimulus measures are likely to be announced soon to stimulate the economy, which analysts predict to contract by 10-15% in FY21.

There other factors that also weighed in for not presenting MTEF. The recommendations contained in final report of Fifteenth Finance Commission (due by October end) will determine the distribution between the Union and the States of the net proceeds of taxes from FY22 to FY26. The grant-in aid to be given to states from the Consolidated Fund of India will also be determined by the recommendations of the Finance commission (FC). Grants to Urban Local Bodies and Panchayats from the Consolidated Fund of India will also be decided on the basis of FC recommendations.