Skewed government spending

by Manasi Swamy

While the Prime Minister has made announcement of large spending packages since late March 2020, the actual spending by central government during April and May has been tepid to say the least. And, the spending is skewed such that it starves some ministries to enable larger expenses on the announced schemes.

During April-May 2020, the central government spent Rs.5.1 trillion. This was 0.2 per cent lower than its spending in April-May 2019. The progression has moved from a 20.6 per cent y-o-y increase in April to a 20.7 per cent y-o-y shrinkage in May. Expenses fell from Rs.3.1 trillion in April to Rs.2 trillion in May. This runs counter to the need of the hour and also to the narrative of big government spending.

Government spending pattern is skewed by an order of April 6, 2020 that classifies ministries and departments into three categories. Category A ministries have no restrictions on the temporal distribution of the annual budgeted spending. Category B and Category C can spend only 20 per cent and 15 per cent of their annual budget in the first quarter, respectively.

Category A comprises of those that are committed to spend towards the March 26 announcements of Pradhan Mantri Garib Kalyan package. The same ministries were to also spend on the announcements of the Atma Nirbhar Bharat package announced in mid-May.

Category A ministries spent Rs.2.8 trillion during April-May 2020, implying a 17.5 per cent y-o-y increase. Implicitly, ministries and departments in the other two categories experienced a sharp fall in spending.

Department of food & public distribution, which is in Category A, spent Rs.465.8 billion during April-May 2020. This is 40 per cent less than a year ago. But, it does not seem to account for the record wheat procurement and free distribution of food grain under the Pradhan Mantri Garik Kalyan Ann Yojana. Food Corpn of India claims a food subsidty of Rs.1.42 trillion for the first quarter of 2020-21. Of this, the government has compensated it with only Rs.200 billion. It has now become a practice to systematically defer payments due to the FCI and understate the fiscal deficit.

The heavy spending in Category A was concentrated in rural development, agriculture and health ministries.

The ministry of rural development spent Rs.596.1 billion in April-May 2020. This is more than double the Rs.257.9 billion it spent during April-May 2019. Of the increase, Rs.115 billion went towards clearance of past wages and part of it was because of an increase in MGNREGS.

The department of agriculture, cooperation and farmer welfare reported an 88.8 per cent increase in spending to Rs.305.8 billion. This includes disbursement of Rs.182.5 billion to 91.3 million farmers during the lockdown up till May 9, 2020 under PM-KISAN. The department of health and family welfare increased its expenditure during April-May 2020 by 34.9 per cent y-o-y to Rs.158.5 billion.

Category B ministries spent Rs.1.8 trillion during April-May 2020. This implies a shrinking of expenses by 12.3 per cent compared to the spending during April-May 2019. The only big increase in Category B was towards building roads. The ministry of road development and highways spent Rs.126.4 billion during April-May 2020 which was manifold bigger than the Rs.3.3 billion spent on this ministry in April-May 2019. But, this is also a reflection of the exceptionally low spending in April-May 2019.

Spending by the ministry of defence was cut 35 per cent to Rs.718.6 billion. Expenditure on police fell 9.5 per cent to Rs.181.6 billion. Cash outgo of petroleum subsidy was down by 25.3 per cent and fertiliser subsidy was down by 1.2 per cent.

Category C ministries experienced a steep 35.4 per cent fall in spending during April-May 2020 compared to a year ago. Ministries that suffered big hits include women and child development, housing and urban poverty alleviation, human resource development, water resources, mines, MSMEs, atomic energy and commerce.

On June 29, the government extended the expenditure management measures adopted for the first quarter to the second quarter as well. As a result, Category B and C ministries will continue to see a fall in their spending.

If the 0.2 per cent y-o-y fall in government spending in the first two months of 2020-21 is an impact of such expenditure management then extrapolating this seems ominous. It implies that the government will spend less or, it implies that central government spending will grow only modestly in this year of serious economic challenges. Besides the adverse impact of such an outcome on aggregate demand, the impact of skewed spending may have its own adverse consequences. Perhaps, it is too early to generalise. Perhaps, this is the result of real and perceived challenges on government revenues during a year when the economy is shrinking big time.