Fiscal policy reset

The upcoming interim Budget will be the last fiscal policy exercise of the second Narendra Modi government.

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It would also mark the end of what has perhaps been the most difficult five-year term for fiscal management in recent memory.

Although government finances are still recovering from the shock induced by the Covid-19 pandemic, the policy establishment, particularly the Ministry of Finance led by Union Finance Minister Nirmala Sitharaman, must be commended for its adept handling of the situation. Managing government finances during the pandemic period was extremely difficult.

There was no playbook available for reference. The experience of the global financial crisis (2008) was not of much use it was, after all, only a financial crisis! Here was a situation where the entire country had to be locked down. Besides, there was a very limited understanding of the virus in the initial phase. Worse still, India was not the only country dealing with such conditions.

What this meant was businesses stopped functioning, except those considered absolutely essential. This led to massive job losses, particularly in small enterprises and contactintensive services, with very little visibility. Making any medium-term economic projection was nearly impossible. Governments in advanced economies rolled out massive support programmes without caring much about financial implications. India did not have that option. Its debt to gross domestic product (GDP) and the general government Budget deficit were already on the higher side, and a very large deficit would have significantly increased financial stability risks. It is worth remembering that it was not only the expenditure side that Budget managers had to worry about. Revenues were under severe pressure because of the nationwide shutdown.