There is a fiscal glide path that markets would anticipate the government to take, given it’s a pre-election year. Also, how do you think the government will navigate the nature of its spending—whether it is on capex and infrastructure-related items, or to aid the rural consumer?
For macro stability, there are two elements. One is to continue doggedly with fiscal consolidation because our starting points are elevated.
The central and state deficits, including the PSU borrowing, are close to 10% of GDP. That will warrant us bringing those deficits down. Fiscal management has been excellent in recent years, with the government meeting or exceeding its fiscal deficit target each time. This was again a very difficult year with lots of fiscal pressures, and the government deserves a lot of credit for reiterating its commitment to stick to the target of 6.4%.
So, from a market perspective, the first thing to do is take away the uncertainty. The government has committed to a fiscal deficit glide path of 2% of GDP over the next three years. So if we get about 0.5-0.6% of GDP consolidation this year, the deficit goes from 6.4% to 5.8% or 5.9%. That will be very much in line with what markets expect, and therefore, it will take away uncertainty.
Secondly, having a medium-term fiscal anchor will be useful because, in an environment of so much uncertainty, both globally and domestically, the best thing that policy can do is reduce uncertainty and create stability, constancy, and consistency. Having a medium-term debt anchor, whether we want to stabilise the debt at current levels or gradually bring it down, will just give market investors and rating agencies something to hang their hats on.
On growth, when deficits come down at the margin, that impinges on demand. But another area where the government’s been very good is prioritising capital expenditure. The government decided in 2020 that sustained public investment and infrastructure spending were going to be India’s ticket out of the pandemic, and the job creation that comes with it is crucial to recovering from this pandemic.
To the extent that capex keeps moving up and the quality of expenditure improves with larger multiplier effects, this is the best support that the budget can offer for growth.