Relief package: Spending curbs on ministries seen offsetting cost

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July 05, 2021 4:30 AM

Most departments' spending is learnt to have remained within 20% of BE in Q1 against available limit of 25%.

On June 30, finance ministry asked 81 ministries/departments/organisations to scale down their Q2FY22 expenditure plans by at least 5 percentage points (pps) from the business-as-usual level of 25% of the full-year spending, in view of stress on the government's finances.On June 30, finance ministry asked 81 ministries/departments/organisations to scale down their Q2FY22 expenditure plans by at least 5 percentage points (pps) from the business-as-usual level of 25% of the full-year spending, in view of stress on the government's finances.

The spending curbs imposed by the finance ministry on several ministries and departments for the September quarter, coupled with the lower-than-business-as-usual expenditure reported by many of them for the June quarter, could amount to budgetary savings of Rs 1.15 lakh crore or thereabouts in the first half of the current financial year. This would almost completely offset the additional budgetary spending commitments for the whole of FY22, arising from a set of relief measures announced by the government recently to soften the blow of the second wave of Covid-19.

Various agencies have estimated the fiscal cost of the recent relief packages at Rs 1.2-1.3 lakh crore. Of course, a thrust being given to capital expenditure, a likelihood of a gradual increase even in the revenue spending in the second half of the year and overall revenue shortfalls could still put pressure on the fiscal deficit target of 6.8% of the year. But unless a more savage third wave hits the country and the whole fiscal plans go haywire, the fiscal deficit might not widen much beyond the budgeted level.

According to official sources, less-than-budgeted level of spending could continue for many departments in Q3 also.

On June 30, finance ministry asked 81 ministries/departments/organisations to scale down their Q2FY22 expenditure plans by at least 5 percentage points (pps) from the business-as-usual level of 25% of the full-year spending, in view of stress on the government’s finances.

Most departments’ spending is learnt to have remained within 20% of BE in Q1 against available limit of 25%.

Thanks to capping of spending at 20% in Q2, the cumulative saving from both quarters will be about Rs 1.03 lakh crore or 10% of the respective BE of Rs 10.35 lakh crore. On top of this, the departments exempted from spending curbs also could spend only 25% in Q2, meaning that these departments can’t carry forward their savings from Q1 to Q2.

The level of savings will vary among departments – the move will likely compress spending on defence (revenue) by Rs 11,000 crore or about 10% of estimated spending in the first half of the current fiscal. As for higher education, the spending will be less by Rs 3,800 crore or a steep 20% in H1. Spending cuts will be Rs 2,700 crore in school education (less by 10% from the H1 estimate). The spending squeeze could be even sharper for departments such as labour, which spent only 1% of their full year BE of Rs 13,307 crore, in April-May, and might not have been able to utilise more than 10% by June.

The Centre’s total expenditure is budgeted to be Rs 34.83 lakh crore (BE) in FY22, about 0.8% lower from the actual in FY21. Speaking at The Indian Express Idea Exchange on July 2, chief economic adviser Krishnamurthy Subramanian stressed the need for augmenting capital expenditure by the government to give the much-needed support to growth, while saying that unconditional transfers that would inflate revenue expenditure, might not be the best way to address the distress among people and businesses due to the pandemic. “I don’t think there should be any problem for us in meeting the fiscal deficit targets for this year. The effort of the government is to try and limit spending that does not generate as much bang for the buck for the economy, and instead, direct that for capital spending,” he said.

The spending controls imposed on ministries are part of re-prioritisation of spending in the wake of second wave of the pandemic. Similar measures were employed in April-November of FY21, but the full-year budgetary expenditure by the Centre in the year turned out to be Rs 35.11 lakh crore or 15.4% higher than BE of Rs 30.42 lakh crore thanks to additional expenditures incurred to give relief to people as well as clearance of large chunks of food and fertiliser subsidy arrears even while bringing these items above the line.

While analysts have doubts about the Centre achieving Rs 1.75 lakh crore disinvestment target, finance ministry officials are hopeful that FY22 tax revenue target will be surpassed thanks to economic revival and better compliance.

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