As multiple crises hit, a case for fresh economic assessment to Parliament

Given the Covid-19 pandemic, and now the war in Europe, economists assert there could be a case for reviving the practice for the sake of fiscal transparency at least temporarily

From 2004 to 2016, the Union Finance Ministry used to table in Parliament what is known as the mid-year economic review.

The purpose of this document, which was usually released in December and was drafted by the Chief Economic Advisor, was to assess the domestic and global macro-economic conditions, and the performance of the central government in terms of revenue and expenditure in the first half of the year (April-September). The finnace ministry would then determine how all this would impact the targets laid out in the previous budget, including fiscal deficit and gross domestic product.

Former CEA Arvind Subramanian was the last to bring out the mid-year economic review, in 2015-16. Since then, the argument has been that the Monetary Policy Committee’s detailed reports post their monetary policy meetings provide a regular overview and assessment of the Indian economy. So there was no need to issue a separate document outlining the same by the Finance Ministry.

However, given the events of the past two years, including the Covid-19 pandemic, and now the war in Europe, analysts and economists argue that there could be a case for reviving the practise for the sake of fiscal transparency. If not on a permanent basis, then at least for the time being, the Parliament could be presented with fresh budget assessments, they say.

“Having such a document is always useful in that we get the government’s sense of what is happening in the economy. But there is a counter-argument saying there may be a bit of redundancy since none of the mid-year reviews carried any new data,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Sabnavis said that at a time when India has been hit by external shocks as commodity prices have shot up due to the war in Ukraine, a commentary by the centre is important as the RBI and the government may not necessarily be convergent in their views of the economy.

“I feel the government should come up with revised budget numbers,” he added.

The case of FY23

The Modi government’s decision to extend the PM Garib Kalyan Anna Yojana (PMGKAY) till September will increase the food subsidy outlay for FY23 to Rs 2.86 trillion from the budget estimate of Rs 2.06 trillion. This coupled with high global commodity prices and their impact on fertiliser subsidies has put the Centre’s fiscal deficit target for FY23 under stress, even though the year has just begun.

Provided all other assumptions in the 2022 Union Budget remain the same, calculations show that the Rs 80,000 crore outlay to extend PMGKAY will take the FY23 fiscal deficit budget estimate (BE) to Rs 17.4 trillion from Rs 16.6 trillion, or 6.74 percent of GDP from BE of 6.4 percent.

The fact is that other assumptions may not remain the same. The BE for fertiliser subsidy in FY23, which begins April 1, at Rs 1.05 trillion is also under threat due to elevated commodity prices. While policymakers are unwilling to put a new number to it yet, industry experts say that at current prices, the centre may have to shell out between an additional Rs 40,000 crore to Rs 1 trillion in fertiliser subsidies.

“Presenting a new report on the economy and the budget will be a good thing to do because we need a fresh assessment of how the revenue and expenditure performance is going to be. Other than personal income tax, every other projection is dependent upon nominal GDP,”  said Devendra Kumar Pant, Chief Economist, India Ratings.

Business Standard spoke to a senior official in the Finance Ministry, who personally agreed that many budget estimates do not hold anymore, but added that there was no plan in the government to present fresh estimates to Parliament.

What some previous Mid-Year Economic Reviews said

It should be remembered that MPC’s forecasts are on real GDP growth and retail inflation. The main projections for a given year in the budget are nominal GDP and fiscal deficit.

In the last ever mid-year review, the economic division of the Finance Ministry, then headed by Arvind Subramanian, had written for FY2015-16: “It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP. Slower-than-anticipated nominal GDP growth (8.2 percent versus budget estimate of 11.5) will itself raise the deficit target by 0.2 percent of GDP. The anticipated shortfall in disinvestment receipts will add to the challenge.”

It is in the time of global economic shocks, like the current one, where the commentary by the mid-year review really reveals the thinking within the government.

Arvind Virmani was the CEA when the 2008-09 review was released, while Kaushik Basu held that post in 2009-10. These two reviews came immediately after the global financial crisis.

The 2008-09 mid-year review, which came immediately after the Lehman Brothers bankruptcy, still held a view of cautious optimism, though it still warned that there would be capital outflows and flight of investment, and that India’s exports.

The next year’s survey however, was a tad bit more alarmist. While the tone was of the worst having been over, it still warned of rising household inflation, low credit growth, stagnating growth in the agriculture sector, and asked whether the RBI needed to deviate from its expansionary monetary policy stance.

“Is the Indian economy headed towards the point where it would again have to contend with the challenge of the mutually contentious trinity - of maintaining a balance between the objectives of price stability, exchange rate stability and capital mobility?” the 2009-10 mid-year review asked.

“Going forward, with the return to a high growth path, credit off take and surge in demand, the problem (of price stability versus capital mobility is likely to persist,” it had said.