Needed: Fiscal policy reset

Government intervention during the pandemic seemed conscious of the fact tha India's fiscal position was not very strong at the beginning of the crisis

- RAJESH KUMAR

The first Budget of the third Narendra Modi government is expected to present the medium-term roadmap for the Indian economy.While the message from the top is that of continuity, structural shifts will be required in some areas. One such key area is the conduct of fiscal policy.

Fiscal backdrop

The last term of the government was perhaps the most difficult in recent memory for fiscal management because of the pandemic-related disruptions. However, after a contraction in the pandemic year, the Indian economy recovered quickly and has been growing at an annual rate of 7 per cent or more.

The biggest policy target thus should be to build on the postpandemic recovery and sustain the momentum for an extended period. The Union government, and particularly the leadership team at the Ministry of Finance, must be commended for not going overboard with expenditure increases during the pandemic, unlike many advanced economies, despite similar advice given for India by well-known economists.

If the government had heeded suggestions like monetising the Budget deficit worth 5-10 per cent of gross domestic product (GDP), India would have been in significant problems. The government rightly made selective interventions such as cash transfers to the most vulnerable sections of society and distribution of free food grains.

The government intervention seemed conscious of the fact that India's fiscal position was not very strong even at the beginning of the crisis, with a debt-to-GDP ratio of around 75 per cent. Nonetheless, the Union government's fiscal deficit increased from 4.6 per cent of GDP in 2019-20 to 9.2 per cent in 2020-21, partly because of a sharp decline in revenue collection on account of pandemic-related disruptions.