Economic Survey 2021-22: India's agile fiscal policy response

The year 2021-22 saw a strengthening of the Centre’s fiscal position despite sustained spending on health and infras­tru­cture. Both fiscal deficit and primary deficit stand at much lower levels this year (up to November) than the previous two. This year’s Economic Survey in Chapter 2- Fiscal Developments attributes attributes the improved fiscal performance to higher revenue collections and targeted expenditure. While the Centre’s revenue receipts have grown at a much higher pace during the current FY (Apr-Nov 2021) in YoY terms, and even over the pre-pandemic year, its sustained emphasis on capital spending in infrastructure-intensive sectors has continued.

India’s fiscal policy strategy during the last two years highlights the use of a unique feedback loop-based ‘agile’ approach. The Survey illustrates this responsive strategy through various channels. The most prominent example discussed in the Survey is the calibrated fiscal stimulus announced during the pandemic. A series of packages was spread throughout the last two years based on the evolving situation. This differed from the ‘Waterfall’ approach of pre-committing a front-loaded stimulus package, as adopted by most other countries in 2020.

In an uncertain environment, the agile approach enables the most efficient use of scarce resources by ensuring that the essentials are taken care of, thereby hedging against unpredictable negative outcomes.  Measures such as direct benefit transfers, emergency credit and guarantees to the small busin­esses, and the world’s largest food subsidy programme enabled the creation of safety-nets to cushion the impact on the vuln­erable. The spending on social services rose by 20 per cent during FY21 (Revised Estimates) and was further budgeted to increase by 16.6 per cent during this FY.

As the economic activity was restored, the mix of stimulus was altered to stimulate demand in the economy. Measures such as PLI, sectoral support to encourage infrastructure investment, and the capex boost formed a key comp­onent of the stimulus mix at this stage. Building on this strategy, the budgeted capital spending for 2021-22 was enhanced by 30 per cent. The stimulus announcements this year have continued the emphasis on liquidity enhancing and investment boosting measures to support the reviving economy, apart from providing free food grains to the poor. In line with the agile approach, this mix can keep changing as per the requirements of the evolving situation.

The changing emphasis on capital expenditure throughout this period reflects a quick responsive fiscal policy. The capex, which was restrained during the first two quarters of 2020-21 due to movement restrictions and unavailability of labour, was increased later during the year as the restrictions eased. The Survey shows the focus on capital spending has been sustained during this fiscal.

The Survey also discusses several other responsive fiscal policy strategies such as the continuous impro­vements in GST over the last four years.  Considering stakeholders’ feedback, the GST Council has been responding swiftly to make necessary changes, address the glitches and carry out various rate rationalizations to correct the inverted duty structure. This has contributed in the steady growth in the GST revenues over the last four years. The average monthly GST collection has increased from Rs 90,000 crore in 2017-18 to Rs 1.19 trillion in 2021-22 (up to December).

Another area where the use of feedback-based agile policy response is emphasised in the Survey is the change in excise duty on petrol and diesel during the last 2 years. Taking advantage of the low global oil prices in 2020-21, the Central excise duty on petrol and diesel was raised by the government to garner revenues when all the major tax sources were adversely impacted by Covid. As a result, excise duty collections registered a YoY growth of more than 60 per cent in 2020-21 (Provisional Actuals). Nonetheless, by the end of November 2021, the situation had changed – the global oil prices soared up, other tax revenues by the Government recovered and inflationary pressures emerged in the economy. Accordingly, the government changed its policy and lowered the Central excise duties on petrol and diesel.

To conclude, such a responsive feedback-based policy making by the government ensures efficient management of limited fiscal resources in the economy, which is even more crucial in times of an unprecedented crisis.

The writer is deputy director, Ministry of Finance, Govt of India.