Jun 14, 20213 min read

Fresh stimulus unlikely in Q1, focus shifts to undertaking budgetary capital spending

The government is unlikely to announce any new fiscal stimulus until the later part of the September quarter, as focus shifts to undertaking budgetary capital spending and prodding Central pubic sector undertakings (CPSEs) to invest more aggressively.

“The Budget for FY22 was prepared, keeping in mind the need for fast recovery after the pandemic. So, it already factors in certain amount of demand stimulus and other relief measures,” an official source told FE. Additional demand stimulus at this stage when the supply side is constrained by lockdowns in certain states can potentially stoke inflation, another source said.

However, with the second pandemic wave waning, the Centre will expeditiously implement crucial Budget proposals, mainly in infrastructure. It is also open to raising its capital expenditure later this fiscal from the budgeted Rs 5.54 lakh crore, should there be a pressing need for it, the first source quoted above said.

Elevated capex and completion of large projects will boost employment and ultimately spur consumption, government officials reckon. Still, allocation for certain schemes, including MGNREGS and the Rs 3-lakh-crore guaranteed loan programme, may be further expanded, depending on demand.

On Friday, finance minister Nirmala Sitharaman asked various infrastructure ministries and central public-sector enterprises (CPSEs) to “front-load” capex and ensure timely completion of large projects.

The government’s budgeted capex for FY22 is over 30% higher than FY21, while targeted revenue expenditure is actually 5% lower, showed the CGA data. As for CPSEs, capex of a dozen of them in the critical oil and gas sector jumped as much as 25% on year in April to Rs 5,610 crore.

Asked about the need for demand stimulus, another source said: “We are just over two months into the fiscal. It’s too early to have a meaningful analysis of full-year revenue position and the extent of damage caused by the ongoing second wave.”

So, any package to spur demand may be approved only after a careful assessment of its necessity and hinges on the fiscal space, he added.

Having rolled out “massive” relief packages last year to soften the Covid blow, the Centre is cautious this time around, as fiscal space (without substantially expanding borrowing) remains limited. Some analysts have already estimated fiscal deficit to rise by up to one percentage point from the FY22 target to 7.8%.

Importantly, given the outbreak of the second wave and the warning of a third one later this year, the government intends to rationalise certain spending requirements to boost expenditure on healthcare. Its allocation of Rs 35,000 crore for Covid vaccines in FY22 may have to be raised, and the government is conscious of it.

However, the scope for further debt accumulation to keep boosting expenditure is much more limited now than a year earlier. The centre’s debt zoomed to about 63% of GDP in FY21, as it was forced to launch costly relief packages to soften the Covid blow even when revenue mop-up crashed. Factoring in the loans of states, the general government debt surged to 90% last fiscal. This raised the general government interest cost to as high as 28.5% of revenue last fiscal from 22.9% in FY20.

Any further debt accumulation will only weigh down debt affordability and may prompt global agencies to review their ratings or outlook of India. The focus, now, is on targeted expenditure, with high multiplier effect, to bring back growth without straining the finances.

The RBI on Friday joined a number of agencies in trimming its FY22 growth projection for the country, factoring in the damage caused by the second wave and consequent lockdowns in certain key states. While the central bank pared down its forecast to 9.5% from 10.5%, some others were less sanguine, as they trimmed theirs by up four percentage points to 8-10%.