Govt must persist with fiscal prudence as deficit grows

With several projections suggesting India’s fiscal deficit in 2020-21 could touch about 8 per cent of the gross domestic product (GDP), the government must tread with caution as the chorus for a larger stimulus package becomes louder, especially with the kicking in of the festive season. The Narendra Modi regime has been keen on maintaining the fiscal discipline, often without much success; there is no point in sullying its reputation in this department.

In May, India rolled out a Rs 20 lakh stimulus package to boost the economy.

Finance Minister Nirmala Sitharaman has already sought Parliament nod for an additional expenditure of Rs 2.35 lakh crore for the current financial year, giving rise speculation that a part of this sum could be on a post-facto basis, in addition to the already announced measures.

The overall fiscal deficit—combined deficit of the Center and states—could well be in double digits, in the range of 12 per cent. Though the economy contracted by a shocking 23.9 per cent in the first quarter of the current financial year, there are visible signs of recovery in the subsequent months.

The BJP’s national spokesperson on economic affairs Gopal Krishna Agarwal said that the government’s focus is on economic recovery. “Fiscal expansion has already taken place and the government is committed to look into the demands of the economy but at the same time, it is critical to learn to coexist with the coronavirus pandemic and allow economic activities to normalize,” Agarwal said.

Sources said that an even a larger fiscal deficit could spell serious problems for the country as it can even destabilize the overall financial stability.

Sources said that an even a larger fiscal deficit could spell serious problems for the country as it can even destabilize the overall financial stability.

Confederation of Indian Industry (CII) chief economist Bidisha Ganguly said that a stimulus package has already been rolled out, but the need of the hour is to completely lift the lockdown. At present, many states are following localized lockdowns to contain the spread of coronavirus.

“We must understand that the contraction was a result of the nationwide lockdown in April and May, which then was extended partially to even June. The way to fix the problem is to lift the lockdown completely and assure the industry has to be given to the industry,” Ganguly said.

However, Pahle India Foundation (PIF) senior fellow and head of research Nirupama Soundararajan pointed out that the fiscal deficit is a tool that can help but it needs to be used wisely. “This is an unprecedented situation and we need to let go of fiscal deficit target and fix the economy and the fixing the economy needs money,” she said.

An industry captain, who did not wish to be identified, also underlined the need for immediate rolling out of the measures announced as part of the stimulus package. “Implementation is key and that has not happened as many sectors including the micro small and medium enterprises (MSMEs) are currently facing a severe liquidity crunch,” he said..