Centre promises to spend more but pulls its purse strings

by Manasi Swamy

Central Government managed to arrest its gross fiscal deficit (GFD) at Rs.436.5 billion in September 2020. This is the lowest monthly deficit reported since the beginning of the current fiscal. Compared year-on-year, the deficit was lower by a sharp 55.3 per cent.

The deficit shrank owing to a 26 per cent cut in government expenditure to Rs.2.3 trillion in September 2020 compared to the same month a year ago. The Centre started pulling its purse strings from August, after its gross fiscal deficit surpassed the annual target in July. In August, it cut the expenditure by 15.2 per cent y-o-y and cut further in September.

Funds outflow on debt servicing and subsidies increased sharply in both the months. Interest outgo increased y-o-y by 10.1 per cent to Rs.390.8 billion in August and by 31.6 per cent to Rs.679.9 billion in September. Subsidy payments reported a 31.6 per cent and 16.7 per cent growth to Rs.260.6 billion and Rs.255.1 billion in August and September, respectively.

Revenue expenditure other than on debt servicing and subsidies declined y-o-y by 26.6 per cent to Rs.1.1 trillion in August and by an even steeper 43.3 per cent to Rs.1.1 trillion in September. Among these, expenditure on police declined by 7.6 per cent in August and nine per cent in September and that on pension (including defence pensions) declined by 63.7 per cent in August and 13.5 per cent in September.

Revenue expenditure by the Ministry of Rural Development, which runs the government’s flagship employment scheme MGNREGS, was also down by 34.1 per cent in August and 4.3 per cent in September. The ministry had spent well on this scheme during the lockdown, increasing its expenditure 2.5 times compared to a year-ago during April-July 2020. The Ministry of Agriculture and the Ministry of Housing & Urban Development, which had gone heavy on revenue expenditure in August, recording a 345.6 per cent and 23.6 per cent growth, respectively, pulled back the spending in September. Their revenue expenditure declined steeply, by 43.4 per cent and 52.1 per cent, respectively.

The Centre cut transfers to states and UTs on various accounts, including compensation for loss of revenue due to introduction of GST, by 64.7 per cent in August and by 68.1 per cent in September. It had spent aggressively on this during the first four months of 2020-21 in order to help cash strapped states meet the additional fund requirement arising out of the Covid-19 pandemic. Also, it cleared states’ last year’s GST compensation arrears of Rs.658 billion during April-July 2020.

Capital expenditure, which is considered to be more productive than the revenue spend because of its ability to kick start the growth cycle, declined by 20.9 per cent to Rs.226 billion in August and by 38.9 per cent to Rs.313.9 billion in September. Capital expenditure by the Ministry of Railways fell by 75.8 per cent and 60.4 per cent in August and September, respectively, and by the Ministry of Defence fell by 30.4 per cent and 11.9 per cent in the same order. The Ministry of Road Transport scaled up its capital spend to Rs.95.8 billion in August and Rs.82.1 billion in September from a monthly average of Rs.57.1 billion during April-July 2020. Its September 2020 spend, however, was a steep 52.5 per cent lower than the year-ago level.

The Centre had sought the Parliament’s approval for an additional fiscal outgo of Rs.1.67 trillon in 2020-21 through the first supplementary demand for grants tabled in September 2020. This involved Rs.1.3 trillion additional revenue expenditure towards fulfillment of promises made in the ‘Atmanirbhar Bharat’ package and Rs.37 billion addition capital expenditure for an infrastructural push.

In October, Finance Minister Nirmala Sitharaman proposed Rs.730 billion additional public expenditure, including Rs.280 billion on leave travel concession (LTC) vouchers and encashment by government employees, Rs.80 billion on pre-paid special festival advances, Rs.250 billion additional capital spending on infrastructure and Rs.120 billion for 50-year interest-free loans from the Centre to states for infrastructure building.

This Rs.2.4 trillion aggregate spending is over and above the Rs.30.4 trillion spending budgeted for the fiscal year 2020-21 in February. But, the pace of spending from the budgeted expenditure itself has been slow during the first half of the fiscal.

The Centre spent 48.6 per cent of its annual budgeted expenditure during the first half of 2020-21. The proportion had ranged between 52 and 54 per cent in the preceding four years. The lag was mainly seen in primary expenditure which excludes interest payments, and particularly in capital expenditure within it. The government spent 52.4 per cent of its budgeted annual revenue expenditure excluding interest payments during April-September 2020. This proportion was higher in the range of 55 to 59 per cent in the preceding four years. The progress was even more sluggish on capital expenditure. Capital expenditure incurred during April-September 2020 amounted to 40.2 per cent of the budgeted spend, as against 47 to 54 per cent in the preceding four years.

The central government’s poor spending record so far this year reflects continued weakness in tax collections and the near-zero chances of spectrum sale. Tarun Bajaj, Secretary, Department of Economic Affairs admitted on September 30, 2020 that the government would not be able to meet its disinvestment target this year. These difficulties and the reluctance of the government to increase market borrowing or monetize the deficit pose a serious challenge for the its plans of making an additional expenditure Rs.2 trillion announced through the two stimulus packages this year.

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