The UPA government can’t announce any new populist schemes in the run-up to the 2014 general elections and state governments, regardless of their political hues, will find it impossible to get more central funds unless the released amounts have been fully used. These and a 10% cut — amounting to over Rs 50,000 crore — under certain major heads of non-Plan expenditure, along with a blanket ban on creation of new posts and purchase of new vehicles topped a list of austerity measures unveiled by the finance ministry on Wednesday.
Hard-pressed to meet the fiscal deficit target of 4.8% of the gross domestic product (GDP) — the deficit in the first four months had touched a disconcerting 63% of the full-year target — North Block also gave explicit instructions to all central ministries to strictly abide by the rule that not more than 33% of the Budget Estimate (BE) be spent in the last quarter of the fiscal, while the expenditure in March, the last month of the fiscal, would not under any circumstances, be more than 15% of the BE.
Analysts welcomed the the expenditure compression envisaged by the ministry, as these would help avoid a sovereign rating downgrade but conceded that these spending curbs could have a negative effect on growth, given that private consumption has hit a nadir and corporate investments have hardly improved.
In FY 13, a deep Rs 1-lakh-crore cut in Plan expenditure which mostly includes capital spend, had allowed the Centre to reduce the fiscal deficit to 4.9% of GDP but that indeed had a stultifying effect on growth in the year, which slipped to 5%. The government has admitted that the spillover effect of that expenditure compression was evident in Q1FY14 with the growth slipping to a four-year-low of 4.4%. The government’s final consumption expenditure dropped 6% in the first quarter of this fiscal from the previous quarter.
According to a finance ministry release, every ministry will effect a mandatory 10% cut in non-Plan expenditure excluding interest payments, repayment of debt, defence capital, salaries, pension and Finance Commission