Budget Byte: Post-pandemic Budget has less room for targeted spending

Efficacy of fiscal deficit is limited by revenue deficit - the lower the latter, the bigger the space for capex

Commitments leave little room for targeted spending, FY22 Budget should expand available fiscal space

Indian government’s spending pattern is such that it leaves only a small room for discretionary spending. Interest outgo, which takes up nearly a quarter of total spending, is only going to rise. This structural aspect puts limits to capex as well as welfare spending. Apart from enhanced borrowing, cutting committed expenditure will further create fiscal space.

Fast recovery will give room for capex, curbing primary deficit may be difficult

In this situation, it will be tricky to decide the extent to which the government should borrow. Putting expenditure boost ahead would raise the fiscal deficit. Efficacy of fiscal deficit is limited by revenue deficit (RD): the lower the latter, the bigger the space for capex. RD rose sharply in the first half of FY21. The primary deficit also rose but may decline in the coming years due to higher interest payments towards current borrowing. All rests on better revenue realisation.