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Finance Ministry seeks to rein in revenue expenditure

The ministry is keen on revenue expenditure compression in FY23, given the strong external headwinds, and wants to generate some savings on this front

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This is particularly important at a time when the Centre intends to realise its record budgetary capital expenditure target of Rs 7.5 trillion, betting big on its high-multiplier effect to spur growth.

Faced with the task of managing additional spending commitments within a tight fiscal deficit goal, the finance ministry has asked various departments to avoid presenting new schemes that would warrant substantial revenue expenditure in FY23, official sources told FE.

The ministry is keen on revenue expenditure compression in FY23, given the strong external headwinds, and wants to generate some savings on this front. This is particularly important at a time when the Centre intends to realise its record budgetary capital expenditure target of Rs 7.5 trillion, betting big on its high-multiplier effect to spur growth.

The leash on revenue expenditure may lead to the deferment of certain new schemes, including a Rs 16,635-crore programme for the textiles sector that has been in the works for some time. The new, stepped-up scheme is aimed at not just replacing the latest avatar of the Technology Upgradation Fund Scheme (TUFS) but also promoting integrated manufacturing facilities. Similarly, the government is unlikely to widen the scope of the flagship tax remission scheme for exporters—RoDTEP—to include sectors like steel and pharma, despite industry demand. The Budget has earmarked `13,699 crore for the RoDTEP scheme for FY23.

“Any new scheme will further pressure the fiscal position. So, given the circumstances, it’s better to avoid them, as spending has to be managed prudently,” said a senior official. “However, this doesn’t mean funds won’t be available for any new scheme at all; it will depend on the urgency of the requirement,” he added.

The government’s expenditure management bid, however, won’t impinge on critical extant schemes for which substantial budgetary outlay has already been earmarked for FY23. Out of the budgetary allocation of Rs 73,000 crore for the National Rural Employment Guarantee Scheme, Rs 36,000 crore has already been spent so far this fiscal. Under the PM-Kisan scheme, Rs 22,000 crore, or nearly a third of the FY23 outlay of Rs 68,000 crore, has already been transferred to farmers. Similarly, the National Rural Drinking Water Mission, under which piped water is being provided to each rural household, is unlikely to see any curtailment in funding. The scheme has a budgetary allocation of Rs 60,000 crore for FY23.

The Centre had budgeted to restrict revenue expenditure at Rs 31.94 trillion in FY23, down 0.2% from the actual spending of Rs 32.01 trillion in FY22. It intended to rein in fiscal deficit at 6.4% of GDP from 6.7% last fiscal. However, the Budget calculations went haywire after the Ukraine war caused massive disruptions in the global supply chains, leading to a spike in international commodity prices. This, in turn, led to a surge in fertiliser subsidy Bill, on top of the already-elevated food dole-outs following the government’s decision to extend a programme to supply free grains to the poor by six months through September. The cut in the fuel excise duty in May to tame inflation, in addition to a potential drop in flows of dividend by state-run entities, will further exert pressure on the government’s balance sheet.

Within the Budgetary allocation for FY23, the Centre will likely put a leash on certain avoidable revenue expenditure, as it has announced additional spending of Rs 2 trillion on subsidies over and above the FY23 Budget estimate. Of course, a large part of this additional spending would be offset by extra tax revenue, projected over the budget target.

The Centre’s revenue receipts recorded a meagre 2% rise until May this fiscal from a year before, partly dampened by the plunge in the dividend transferred by the RBI. However, on top of it, a 15% jump in revenue expenditure and a 70% jump in capital spending in the first two months inflated the fiscal deficit to `2 trillion, compared with Rs 1.2 trillion a year before. Nevertheless, tax collection is going to rise in the coming months, breaching the Budgetted target.

Icra chief economist Aditi Nayar said: “Higher-than-budgeted revenues and nominal GDP will absorb a large portion of the extra expenditure. Unless free grains are extended beyond September 2022, we expect the fiscal deficit to print at 6.5% of GDP, mildly overshooting the budgeted level.” According to Nomura, even before the government last week reversed its course on the windfall tax on petroleum products, the Centre’s fiscal deficit was tracking at around 0.4% of GDP above the budget estimate of 6.4%, despite expectations of higher nominal GDP. It has now maintained its FY23 fiscal deficit forecast of 6.8% but added fiscal risks remain elevated.

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