India Budget: Of False Choice & Feasibility

Mizuho Chart Speak from Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,

“Wisely and slow; they stumble that run fast.” – William Shakespeare, Romeo and Juliet

India’s FY21-22 Budget will have to walk a razor-thin, tight rope balancing a path to consolidation, but not at the expense of growth restoration. To which end, FY21-22 headline fiscal deficit reduction needs to be a measured decline, not tumble, to ~6.0% of GDP from ~7.2% (by our estimates) in FY20/21.

First things first. There is no denying that a solid and achievable fiscal consolidation roadmap is imperative. But equally, the adverse, economic shock dealt by COVID-19 demands realistic, re-engineered fiscal consolidation plans; and not a hasty reversion to pre-COVID consolidation plans/time-line.

Point being, FY20/21 deficit blow out to 7.2% from pre-pandemic plan of 3.5% deficit, will not only strain fiscal math to get back to ~3.0% on a comparable timeline, but crucially, such fiscal extremism will risk undue, self inflicted economic hardship. In particular, ensuring that the most vulnerable segments of society and MSMEs get adequate financial support through the fragile recovery.

In other words, India must avoid the trap of a false choice between restoring growth and getting back on a path to fiscal consolidation. The latter is lost cause without the former. Whereas any sustainable consolidation must be anchored in revenue feasibility, which in turn requires restoring solid growth potential (6-8%).

To be clear, this is not an endorsement of profligacy with abandon. Rather, it is phasing out public spending in a way that allows the private sector to sustainably pick-up the slack amid more even recovery. The fiscal math equivalent of “growing out” of fiscal slippage and debt, enhanced by the simultaneous “denominator” (higher GDP) and numerator (improved revenue-expense dynamics) effects.

Revenue, and ultimately fiscal feasibility rely on the ability to monetize growth restoration as wider and deeper tax revenue base. This ranges from improving the efficacy of GST collections to help fund growth-enhancing investments (education, infrastructure, etc) to realising planned divestments towards sustainable debt dynamics.

The hope is that rating agencies recognise the false choices and feasibility; and do not myopically resort to negative credit action, perversely penalizing judicious fiscal consolidation plans.

Credit Source: Mizuho Bank Ltd