ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Union Budget 2021–22

The Macroeconomic Framework

Union Budget 2021–22

High deficit has no fiscal costs if it can be substantiated with increased public investment or “output gap” reduction. When the monetary policy stance has limitations in triggering growth through liquidity infusion and the status quo policy rates, “fiscal dominance” is crucial for sustained growth recovery.

 

Extraordinary times require extra­ordinary policy responses. Aga­inst the backdrop of macroeconomic uncertainty due to the CoVID-19 pandemic, the union finance minister has announced a high fiscal deficit of 9.5% of gross domestic product (GDP) in revised estimates (RE) 2020–21. This is against the pegged deficit of 3.5% in budget estimates (BE) 2020–21. Simultaneously, the finance minister has also announced an excessive deficit procedure to bring down the high fiscal deficit to 4.5% of the GDP by financial year (FY) 2026. High fiscal deficit is widely perceived as detrimental to the economy. The perceived economic reasoning is that deficit may crowd out private capital formation and widen the “output gap.” The output gap is the difference between actual GDP and potential GDP (Chakraborty and Kaur 2020; Chakra­borty 2016).

Reconsidering Fiscal Rules

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Updated On : 4th Mar, 2021

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