Government's puzzling reluctance to spend

by Manasi Swamy

GDP data revealed that besides the second wave of Covid-19 deficient government spending constrained India’s economic recovery in the June 2021 quarter from the slump of fiscal 2020-21. Government final consumption expenditure (GFCF) fell year-on-year by 4.8 per cent in real terms during the quarter.

The government expenditure here includes public spending by both, the central and the state government. As per the data released by the Controller Auditor General (GAG), 20 state governments reported a 17.2 per cent increase their expenditure in the June 2021 quarter. But, the central government, on the other hand, kept its expenditure constant at the year-ago level. In real terms, this implies a 4.9 per cent fall in central government expenditure.

The second quarter of 2021-22 too began on a weak or rather weaker note in terms of government spending. The 17 state governments that have disclosed their finances for July 2021 so far, reported a 7.6 per cent y-o-y growth in expenditure to Rs.1.9 trillion. The central government continued its conservative approach. It spent Rs.1.8 trillion in July 2021, which was 23.3 per cent lower than the expenditure incurred during the same month a year ago. Both, revenue and capital expenditure declined in July 2021 compared to July 2020.

Revenue expenditure declined in July 2021 by 22.7 per cent to Rs.1.7 trillion compared to July 2020. Of this, interest outgo increased by nine per cent to Rs.415.2 billion, while outgo on major subsidies was down by 22.2 per cent at Rs.199.8 billion. Provision for petroleum subsidy contracted by a steep 98.7 per cent to Rs.533 billion. Food subsidy outgo declined by 37.2 per cent. The Food Corporation of India (FCI) claims that the government owed Rs.843 billion to it at the end of June 2021. But, the Centre provided only Rs.100 billion for food subsidy in July 2021, allowing the arrears to pile up. Fertiliser subsidy outgo increased y-o-y by 76.5 per cent to Rs.99 billion in July 2021.

Most central ministries axed their revenue expenditure in July 2021 following the government’s directive of arresting their quarterly expenditure below 20 per cent of the annual budgeted spend in the September 2021 quarter. Even those ministries which are exempted from this directive adopted a cautious approach on spending.

Revenue expenditure by the Ministry of Agriculture & Farmers’ Welfare at Rs.25.5 billion was 81 per cent lower than in June 2020. The Ministry of Rural Development, under which the centrally sponsored rural employment guarantee scheme MGNREGA is run, slashed its revenue expenditure by 27.4 per cent to Rs.107 billion in July 2021. Revenue expenditure on pension (civil and defence) declined y-o-y by 3.8 per cent to Rs.146 billion in July 2021. Revenue expenditure on police in July 2021 was higher than in July 2020, but by a modest 5.4 per cent.

The Ministry of Health & Family Welfare, on the other hand, reported a 12.7 per cent growth in revenue expenditure in July 2021 to Rs.62 billion compared to a year ago.

The Centre reduced transfers to state governments and UTs in July 2021 by 39.5 per cent to Rs.164 billion when compared to July 2020.

In July 2021, the government cut its capital expenditure too, by 28.2 per cent to Rs.169 billion. Capital expenditure by the Ministry of Railways declined by 7.7 per cent to nearly Rs.28 billion, while that by the Ministry of Road Transport & Highways fell by 73.3 per cent to Rs.15 billion. Capital outlay on defence at Rs.75 billion in July 2021 was 15.8 per cent lower than a year ago.

The central government has incurred capital expenditure of nearly Rs.1.3 trillion in the first four months of 2021-22. This accounts for 23.2 per cent of their annual budgeted capital expenditure, which is far too lower than the preceding 5 year’s average of 31.1 per cent and 10-year average of 30.1 per cent. Revenue expenditure incurred during April-July 2021 at Rs.8.8 trillion or 29.9 per cent of its annual budgeted target is low too. On an average, in the preceding 5 years, the government had spent 35.8 per cent of its annual budgeted expenditure in the first four months of the fiscal. The ratio averaged 33.3 per cent over the preceding 10 years.

After the weak first quarter, the expectation was that the government would loosen the purse strings once the economy starts re-opening after the second wave of Covid-19. But, the government continued to hold back. This is puzzling, particularly because the government is not constrained for funds. Its non-debt receipts nearly trebled from last year to peak at Rs.6.8 trillion during April-July 2021. The government chose to cut its expenditure by 4.7 per cent and rein in the gross fiscal deficit to a record low of Rs.3.2 trillion or 21.3 per cent of the budgeted annual pace for 2021-22.