The governments will have to effectively balance between continued fiscal support for the fragile recovery process and addressing the medium-term debt-deficit imbalances.
The Centre and states are likely to continue with the counter-cyclical fiscal measures to sustain the momentum of the economic recovery, even as the government is running out of funds due to the severe impact of the coronavirus pandemic. Public investment in healthcare, social housing, education, and environmental protection is the need of the hour to build a more resilient and inclusive economy, RBI said in December’s bulletin. However, the governments will have to effectively balance between continued fiscal support for the fragile recovery process and addressing the medium-term debt-deficit imbalances, while ensuring good housekeeping and adequate transparency in the fiscal reporting, RBI added.
The fiscal deficit for the government in 2020-21 crossed 100 per cent of the budgeted amount by the fourth month of the financial year and stood at 119.7 per cent of the budgeted amount by October 2020. On the other hand, the revenue deficit stood at 126.7 per cent of the budgeted amount by October 2020, indicating a deterioration in the quality of expenditure.
The fiscal deficit for states in the first half of the current fiscal year stood at 58.4 per cent of the budgeted amount, which was significantly higher than the 35-40 per cent in a normal year. With deterioration in fiscal balances at both levels of the government, the combined fiscal deficit in H1 FY21 stood at 85.9 per cent of BE, significantly higher than 70 per cent in the same duration last year.
Meanwhile, the common man will still have to shell out more money to buy household items in the next few months. RBI said that the outlook for inflation has turned adverse relative to expectations in the last two months. While cereal prices may continue to soften with the bumper kharif harvest arrivals, and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels. Also, the cost-push pressures continue to impinge on core inflation, which could remain sticky. The central bank has estimated that CPI inflation will remain at 6.8 per cent for Q3, 5.8 per cent for Q4, and 5.2 to 4.6 per cent in H1 FY22.