Central government expenditure increased by Rs.7.6 trillion or by 28.4 per cent in 2020-21. The increase was from Rs.26.9 trillion in 2019-20 to a revised estimate of Rs.34.5 trillion in 2020-21. This revised estimate was also Rs.4.1 trillion higher than what was budgeted for the year. This is apparently, an increase in government spending that behoves the colossal crises the economy faced during the year. The previous big-spend was of 24 per cent in the year of the global financial crisis in 2008-09.
But, these big numbers of 2020-21 were used largely to regularise government books of accounts and partly to provide relief and not to revive the economy. The government has therefore continued to be fiscally frugal even in the year of the crisis. Not much has changed since the beginning of 2020-21 as we explain below.
In the first half of 2020-21 when the economy was ravaged the most by the pandemic central government spending was lower than it was in the corresponding period of the previous year. This was perplexing to say the least as that was when the economy needed the greatest help through increased government spending.
Then, in the third quarter, the government finally loosened its purse strings. Government spending in October, November and December 2020 was 9.5 per cent, 48.3 per cent and 29.1 per cent higher respectively, compared to the corresponding months of 2019. As a result, government spending in the first three quarters of 2020-21 was cumulatively 8.1 per cent higher than it was in the same quarters of 2019-20.
Now, the finance minister tells us in her speech that 2020-21 will end with government expenditure growing by a much larger, 28.4 per cent. Given a growth of just 8 per cent till the end of three quarters, that leaves a huge task for the last quarter.
But, the finance minister’s speech did not betray any policy stance to indicate that the government had finally decided to spend its way out of the pandemic. This was odd given the figures she quoted clearly indicated surprisingly substantial increase in spending. The contradiction is understandable because, there is a catch. The government is not going to increase spending by 28 per cent as the numbers suggest. The growth in spending is likely to be 17 per cent, if we compare apples to apples and if we are lucky. First, we sort the data to ensure that we are comparing apples to apples.
The government had budgeted an expenditure of Rs.30.4 trillion in 2020-21. This is raised to Rs.34.5 trillion in the revised estimates. This increase is essentially because the government has made a provision of food subsidy in 2020-21 for discontinuation of National Small Savings Fund (NSSF) loans to the Food Corporation of India.
According to data released by the Controller General of Accounts (CGA), the government had spent Rs.1.25 trillion on food subsidy by December 2020. Revised estimates presented by the finance minister in the budget session suggest that it would spend Rs.4.22 trillion on food subsidy in the full year. This large increase of nearly Rs.3 trillion in the last quarter seems to be arising out of a one-time settlement of FCI’s borrowings from NSSF. If this is the case as it seems to be so, this is, in reality, not an expenditure of 2020-21 but a settlement of past dues of the government. It increases government borrowing but it does not increase spending in a sense that could spur demand.
If we therefore, reduce this Rs.3 trillion of settlement from the revised estimate of Rs.34.5 trillion we get a more comparable expenditure estimate for 2020-21. This, at Rs.31.5 trillion works out to a far more modest increase in government spending in 2020-21 at 17.3 per cent.
But, we will have to be very lucky to achieve even this level of growth in government spending because the record till December 2020 is only 8 per cent. To achieve the 17.3 per cent growth in the year, the government requires to increase its spending over the last quarter of 2020-21 by nearly 51 per cent. This could be very difficult, unless the government uses the opportunity to clean up the books a little more.
The above calculations that adjust the 2020-21 government spending numbers also imply that the growth in government spending in 2021-22 will not be flat as the government numbers show. The budget numbers show that government spending would increase from Rs.34.5 trillion to Rs.34.83 trillion. But, if we consider the adjusted expenses of 2020-21 (Rs.31.5 trillion), the growth would be 10.6 per cent.
A growth in government spending of the order of 10-17 per cent during the worst economic crisis in a lifetime is underwhelming. The 17 per cent adjusted growth of 2020-21 can be explained largely as an increase in relief measures. For example, expenses on the MGNREGA increased from a budgeted Rs.615 billion to Rs.1,115 billion. And it is not very different from the 16 per cent increase recorded in 2019-20. Further, the 10 per cent growth in government spending in 2021-22 is just the average growth in spending that the central government has done in the past ten years. This arguably, is lower than what would be required to help the economy recover from the deep contraction it suffered in 2020-21.
The government therefore, effectively continues to follow a conservative fiscal path. Interestingly, it is conservative even as it has turned somewhat honest in admitting part of its past profligacy that was an open secret so far. It has let the fiscal deficit rise to realistic but hitherto unimaginable levels.
The government seems to have noticed that the economy rebounded in the second quarter without it having to spend anything extra to get that growth. It does not seem to see a justification to increase its spending if it can get growth for free. The enigma then is how does growth come for free?