Central Government spending curtailed

by Manasi Swamy

The Central Government managed to curtail its gross fiscal deficit (GFD) to Rs.490 billion in the month of August 2020. Its monthly deficit had ranged much higher, between Rs.1.5 trillion and Rs.2.8 trillion, since April 2020. And, cumulative deficit had crossed its annual budgeted target within the first four months of fiscal year 2020-21.

The curtailment of deficit was achieved by cutting government expenditure to a seven-month low of Rs.1.93 trillion in August 2020. The cut comes at the time when the sagging Indian economy, which suffered the world’s steepest contraction of 23.9 per cent in the first quarter, still needs fiscal support for its recovery.

Compared year-on-year too, government expenditure in August 2020 was lower by 15.2 per cent. Revenue expenditure, at Rs.1.7 trillion, was lower by 14.3 per cent and capital expenditure, at Rs.226 billion, was lower by an even steeper 20.9 per cent. The government spent Rs.8.2 trillion during the first quarter, when the lockdown was in its strictest phase. The spending then was 13.1 per cent higher than a year ago and was focussed on provision of subsistence for the very poor during the lockdown, generation of employment under MGNREGA and clearing dues of state governments and union territories spilt over from last year.

Government’s receipts almost halved during the June 2020 quarter to Rs.1.5 trillion from Rs.2.9 trillion a year ago. With expenditure rising by 13.1 per cent, its gross fiscal deficit expanded sharply to Rs.6.6 trillion from Rs.4.3 trillion in the June 2019 quarter. The year-on-year expenditure growth slowed down to 5.6 per cent in July 2020. And, in August 2020, expenditure actually contracted y-o-y by 15.2 per cent. Cumulatively, the government spent Rs.4.3 trillion during July-August 2020, 4.8 per cent lower than the expenditure incurred during the same period a year-ago. This is the period when the economy was in an unlock mode.

Expenditure by the Ministry of Rural Development, which runs the flagship Mahatma Gandhi National Rural Guarantee Scheme (MGNREGS), reported a triple-digit rise till July 2020. But, in August 2020, the expenditure dropped 34.1 per cent below its year-ago level. At Rs.126.4 billion, this was also the lowest monthly expenditure incurred by the ministry in 2020-21 thus far. The ministry generated 641 million persondays of jobs under MGNREGS in June, which declined to 392 million persondays in July. Job creation under the scheme slowed down even further to 260 million persondays in August 2020 and 174 million person days in September 2020. Good monsoon created better job opportunities in the farm sector this year. Yet, slowing progress of MGNREGS is a pull back for the rural economy which is starved of remittances due to reverse migration of labour.

Transfers by the Centre to state governments and UTs, which are on the forefront of the fight against Covid-19, also declined y-o-y by 3.7 per cent to Rs.219.6 billion in July 2020 and by a much steeper 41.1 per cent to Rs.64 billion in August 2020. The Revenue Department under the Ministry of Finance, which mainly carries out the responsibility of transferring GST compensation cess to the states, cleared last year’s arrears of Rs.658 billion during April-July 2020. But, the expenditure by the Department slumped to Rs.418 million in August due to a stand-off between the Centre and the states over the former’s GST compensation liability towards the latter amid shrinking tax collections due to Covid-19 pandemic.

Transfer of resources by the Centre to the UTs without legislature also declined to Rs.7.1 billion in August 2020, after ranging between Rs.238.9 billion and Rs.553.9 billion during the first four months of 2020-21. Compared y-o-y, transfers were lower by 58.6 per cent in August 2020.

Capital expenditure of the Central Government too declined y-o-y by 47.1 per cent to Rs.235.8 billion in July 2020 and by 20.9 per cent to Rs.226 billion in August 2020 despite finance minister Nirmala Sitharaman having repeatedly assured that the Centre would not compromise on capital spend. These falls were so steep that they pulled down cumulative capital expenditure during April-August 2020 by 1.3 per cent to Rs.1.3 trillion compared to its year-ago level. Ministries like Railways and Housing & Urban Poverty Alleviation reported 5.1 per cent and 26.8 per cent fall in expenditure to Rs.262.8 billion and Rs.70 billion, respectively. Road Transport & Highways was the only capital-expenditure intensive ministry which reported a sharp increase of 88.6 per cent in its spending to Rs.374.1 billion during April-August 2020.

The Finance Minister, in September, sought the Parliament’s approval for first supplementary demand for grants which involved a net fiscal outgo of Rs.1.67 trillion. A major chunk of this is revenue expenditure for schemes announced by the government under the ‘Atmanirbhar Bharat Abhiyan’. The government has a challenging task ahead given continued fall in its tax receipts and thinning prospects of spectrum sale and disinvestment of Air India and BPCL bringing in bulk earnings. But, the challenge posed by a shrinking economy is obviously much bigger with ominous portends. The economy begs a solution and the fisc seems reluctant to play ball.

1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001031010000000000&repnum=20448&frequency=M&colno=1
2. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001031010000000000&repnum=20427&frequency=M&colno=1