Covid effect: Spending curbs to continue in Q2

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Published: May 22, 2020 2:40:49 AM

The Centre gave twice the amount it collected as taxes to states in April-May, expenditure secy

While keeping a tight leash on its own expenditures, the Centre has devolved to states over 190% of tax revenue collected by it till May-endWhile keeping a tight leash on its own expenditures, the Centre has devolved to states over 190% of tax revenue collected by it till May-end

While keeping a tight leash on its own expenditures, the Centre has devolved to states over 190% of tax revenue collected by it till May-end, expenditure secretary TV Somanathan told FE in an interview. He said the Centre might continue to exercise control on expenditures in Q2FY21 too by stipulating department-wise ceilings as it has done in the first quarter. This, he admitted, might result in ‘prioritisation’ of expenditures on Centrally-sponsored schemes.

On the views expressed by some states like West Bengal, Tamil Nadu and Kerala that the conditions set for the states to use the additional borrowing limit of 2% of G-SDP in FY21 are onerous and un-implementable, the official said that, on the contrary, most of the states would be able to utilise the entire extra borrowing space, “as the reforms suggested are feasible”.

Given the uncertainty over the duration and extent of Covid-19 pandemic, it would be premature to state at this juncture whether the Centre’s expenditure would turn out to be within the budget estimate of Rs 30.42 lakh crore in the current fiscal, he said.

SBI researchers have warned recently that states’ capital expenditure in FY21 might turn out to be half the budgeted level of Rs 8.8 lakh crore. They also noted that the Centre’s budgeted capex for the current fiscal year might be equivalent to its uncovered loss (after borrowing hike) of Rs 4.36 lakh crore, implying a potential huge cut in its capex too.

However, the secretary did not state how the Centre’s budgetary capital expenditure, estimated at Rs 4.12 lakh crore, would be impacted by the inevitable spending rejig, but stressed that a reprioritisation of spending would be needed. “If this is the end of the story, then you may be right (that Centre’s expenditure could be within Rs 30.42 lakh crore estimate in FY21 budget). We don’t know the trajectory of the pandemic yet. If the (current) situation continues and migrants don’t come back, then there may be a need for more welfare measures,” Somanathan said.

The Centre has announced a Rs 21 lakh crore economic package, mostly comprising steps to boost credit flows to different segments of the economy, particularly MSMEs and farmers, with fiscal implication of less than Rs 2 lakh crore.

Continuing to provide some relief to the states affected by revenue crunch, the Centre on Wednesday sanctioned Rs 46,038 crore as the May instalment of states’ share in Central taxes, based on the FY21 budget estimate. It had released a similar amount in April too. “We will have to cut (the devolution) later, because we can’t give more than 41% of the divisible pool. But the cuts will come later by which time our hope is that the states would have resumed getting petrol/diesel revenues, excise revenues and state GST in larger amounts,” Somanathan said.

The Centre, as part of the economic stimulus-cum-reforms package unveiled recently, hiked the FY21 net borrowing limit for states cumulatively from 3% of GDP earlier to 5%, providing them an additional borrowing window of Rs 4.28 lakh crore. However, only 0.5% of GDP is unconditional and the rest 1.5% depends on performance on four criteria. The reform linkage will be in four areas – universalisation of ‘One Nation One Ration Card’, ease of doing business, power distribution and augmentation of urban local body revenues. “All the conditions that have been given to the states are to the benefit of the states in the long run.”

On criticism that Centre did not put any condition for itself for availing itself of the additional borrowing limit, Somanathan said the Centre froze dearness allowance for employees and capped spending by a large number of departments for Q1FY21. According to an FE estimate, the cutting of expenditure by departments (by up to 40%) could save Rs 1.4 lakh crore in Q1. “Some form of restriction and categorisation will continue in Q2 as well,” Somanathan said.

“We will be trying to do a rationalisation of both the Central-sector and Centrally-sponsored schemes, not necessarily with the view to cutting budgets, but to remove low value-added and ineffective schemes,” the secretary said. For Centrally-sponsored schemes, the budget estimate for the current year is Rs 2.85 lakh crore while Central-sector schemes have a budget of Rs 38,500 crore.

The 14th Finance Commission upped states’ share in divisible tax pool to 42% from 32%. Ironically, augmented use of the cess/surcharge route by the Centre since then has resulted in a decline in states’ share in Centre’s gross tax receipts or GTR (including cess/surcharge proceeds). As a percentage of GTR, tax transfers to states had jumped from 28% in FY13 to 35% in FY16, but has since fallen to 33% (RE) in FY20. As per a story by the Centre for Policy Research, the actual tax transfers to the states in the 14th FC period (FY16-FY20) were a Rs 6,84,645 crore less than the level estimated by the commission due to lower revenue productivity than assumed.

According to India Ratings, 21 large states saw ‘own revenue’ loss of Rs 97,153 crore in April. The decline could be even worse in May, where the April GST revenue would be counted. The big decline in own revenue hit all states, but the hardest hit were states with lesser dependence on transfers from the Centre, like Gujarat, Haryana, Tamil Nadu, Telangana, Karnataka, Maharashtra and Kerala. About 67-76% of these states’ total receipts come from own resources.

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