Government spending rises, yet too far from target

by Manasi Swamy

The Central Government increased its expenditure year-on-year in October 2020 after a gap of two months. The rise was modest at 9.5 per cent to Rs.1.8 trillion, in comparison to the robust 46.7 per cent y-o-y increase seen in non-debt receipts during the same month. A slower growth in expenditure compared to receipts helped the government mitigate its gross fiscal deficit (GFD) to Rs.391.6 billion in October. This is the lowest monthly level of deficit achieved in the current fiscal so far.

The modest growth in government expenditure in October 2020 was led by capital spending, which more than doubled to Rs.315.2 billion from Rs.137.6 billion in the year-ago month. It was also the second largest monthly capital expenditure incurred in fiscal year 2020-21.

Nearly half of this capital expenditure went towards transport infrastructure building activities. The Ministry of Railways scaled up its capital expenditure to touch its post-Covid peak of Rs.81.8 billion in October 2020. It was also a whopping 176.3 per cent higher than its year-ago level. The Ministry of Road Transport & Highways spent Rs.70.4 billion on capital expansion in October 2020, as against a meagre Rs.670 million spent in October 2019. The ministry has been scaling up its expenditure for the last three months. The National Highway Authority of India (NHAI) went aggressive on awarding projects during the first half of 2020-21. It awarded 40 projects to construct 1,330 km of road length, 60 per cent higher than a year ago. These projects entail an investment of Rs.472.9 billion.

The Ministry of Housing & Urban Affairs incurred capital expenditure of Rs.20.3 billion in October 2020. This too was the highest since the beginning of the current fiscal. It also marked a strong y-o-y rise over the abysmally low capital expenditure of Rs.987 million incurred in October last year.

Transfers to state and UTs by the Centre for capital expenditure soared to Rs.63.6 billion in October 2020. This was 10 times the average monthly transfer of Rs.6.4 million seen in 2019-20 and Rs.6.2 billion in the first half of 2020-21.

Capital outlay on defence, on the other hand, declined y-o-y by 20.6 per cent to Rs.52.8 billion in October 2020.

Government’s revenue expenditure continued to decline for the third straight month in October 2020. It fell y-o-y by 1.3 per cent to Rs.1.8 trillion. Interest outgo increased y-o-y by a steep 47.4 per cent to Rs.278 billion. When excluded from revenue expenditure, the y-o-y contraction in revenue expenditure in October 2020 aggravates to 8.2 per cent.

Aggregate expenditure on three main subsidies food, oil and fertiliser rose by steep 90.3 per cent to Rs.291.9 billion in October 2020, compared to its year-ago level. Revenue expenditure on pension both, civil and defence, too increased y-o-y by 20.5 per cent to Rs.153.2 billion. Revenue expenditure on police, however, declined y-o-y by 6.6 per cent to Rs.77.2 billion. It is worth noting that the Centre’s revenue expenditure on police has fallen every single month in 2020-21.

Revenue expenditure by the Ministry of Rural Development, which runs the flagship Mahatma Gandhi National Rural Employment Scheme (MGNREGS), increased by a robust 75.9 per cent to Rs.105.1 billion in October 2020 as compared to the corresponding month a year ago.

The Ministry of Agriculture, which spent generously till August 2020, reined in its expenditure in September 2020. In October 2020, it cut its expenditure by a steep 83.2 per cent to Rs.171.6 billion compared to its year-ago level. The expenditure also touched its lowest monthly level in the current fiscal.

The government transferred Rs.41.4 billion to union territories without legislation in October 2020. This was three times the amount transferred in the same month a year ago. The government has been transferring funds generously to UTs since the beginning of the current fiscal. The fund transfers to state governments and UTs with legislature, on the other hand, plummeted by 73.7 per cent to Rs.69.5 billion. The Centre made large transfers of funds to the states during the lockdown period April-June 2020. As the unlock process began, the Centre started cutting down on the transfers.

In October 2020, the Department of Revenue, which comes under the Ministry of Finance, returned unutilized funds to the government, which resulted in a negative expenditure of Rs.129 billion for the month. This played a big role in overall revenue expenditure reporting a y-o-y contraction in October. On of the main functions of the Revenue Department is to transfer compensation for revenue loss on account of implementation of goods and services tax (GST) to the state governments. The Department reported revenue expenditure of Rs.660 billion in the first half of 2020-21, a large chunk of which went towards clearing GST compensation dues of states spilt over from the last fiscal.

Even after recording a y-o-y growth in October 2020, cumulative expenditure of the Central Government since the beginning of fiscal 2020-21 remained flat at Rs.16.6 trillion compared to the year-ago level. Of this, revenue expenditure was a tad, 0.7 per cent higher than its year-ago level, solely driven by the 12.9 per cent increase in interest outgo. Capital expenditure at Rs.1 trillion was 2.2 per cent lower than during April-October 2019.

The government had budgeted for a 13.2 per cent increase in total expenditure to Rs.30.4 trillion for 2020-21. Revenue expenditure was budgeted to increase by 11.9 per cent to Rs.26.3 trillion, while capital expenditure was budgeted to grow even steeper by 22.4 per cent to Rs.4.1 trillion.

The Centre’s sluggish performance so far leaves the onus of spending Rs.13.8 trillion on the remaining five months of fiscal 2020-21 if it has to spend its full budgeted expenditure, leave apart the additional spending announced as a stimulus for the economy to recover from the Covid-19 shock. This implies that expenditure will have to surge by 33.9 per cent or more during the last five months of 2020-21. The government will have to scale up its expenditure by 30.1 per cent and capital expenditure by 58.5 per cent.

Media reports suggest that in November 2020, the Ministry of Finance relaxed quarterly expenditure caps imposed on ministries and departments in April 2020. Yet, meeting the budgeted expenditure target for 2020-21 in the remaining months of the year remains an uphill task for the government.