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The large fiscal deficit that has been proposed in Union Budget 2021-22 could be inflationary in nature but not an immediate threat, said Crisil Research.

Accordingly, the budget has replaced fiscal consolidation as a priority with expansion, well into the medium term.

Besides, the fiscal glide path "itself has become footloose" with a deficit at 9.5 per cent for FY21, 6.8 per cent in FY22 and 4.5 per cent by fiscal 2026.

"A large fiscal deficit could be inflationary but given there are under-utilised capacities and the economy continues to grow below potential, this may not be an immediate threat," Crisil Research said in a note.

"But sticky inflation, especially core, and surplus liquidity sloshing around can potentially breed trouble."

In terms of the growth, Crisil Research said the thrust on public investment will be positive for growth, not only in the short but also the medium term as it has a higher multiplier effect than revenue spending and augurs well for jobs.

Besides, the note said the quality of expenditure is improving, with capex rising and revenue expenditure staying below trend.

"Receipts, on the other hand, are estimated to remain 27 per cent below the trend in fiscal 2022. To be fair, this also partly reflects the somewhat conservative revenue targets for fiscal 2022."

"Government revenue, particularly tax collections, go up due to either base effect or rate effect. Nominal gross domestic product (GDP) in fiscal 2022 is estimated at 10 per cent below the trend seen before the pandemic."

According to Crisil Research, the government, for good reasons, has also not introduced tax proposals. Thus, while the base has shrunk, rates have not changed.

"This will lead to under-performance of revenue continuing beyond fiscal 2022, unless compliance goes up substantially."

In addition, the note cited off-budget expenditures such as Food Corporation of India's loans from the National Small Savings Fund and government's fully serviced bonds will now be accounted for when calculating the fiscal deficit.

"Excluding these two items, the fiscal deficit could have been lower by 0.5-1 per cent in fiscal 2021 and 0.6 per cent in fiscal 2022. That is to say, in the more transparent schema, the fiscal consolidation path may stretch longer."