FM plays Shylock with steely grit

Episodes of fiscal stress are unpleasant. But, like war, they are necessary to separate the wheat from the chaff in governments expenditure profile.

The growing overhang of debt servicing

This year interest payments account for 89% of the budgeted fiscal deficit.

The accumulated debt was incurred not to finance infrastructure or enhance investments. It is the consequence of spending more on operations than we earn- a fiscally unsustainable proposition, except for tech companies which grow market value by grabbing market share (often by selling below cost) and growing demand through innovative services.

In the colonial era governments did the same. They conquered new territory (we should know) and milked them for profit. Since this millennium offers no such opportunities, it is high time we redressed this structural imbalance.

Matching revenue expenditure with revenue receipts

Revenue receipts as a proportion of revenue expenditure is the bell weather for any government. Earning less than the spend on operational expenditure leads to borrowing, just to stand still.

Economic growth and the associated increase in government revenues, comes from capital investment. Loans should fund investments not operational expenditure if the growing burden of debt servicing is to be met from revenue receipts.

Till October this year, revenue receipts were just 34% of the budgeted amount versus 46% last year. In nominal terms revenue receipts are 25% lower than last year reflecting the steep fall in GDP in Q1 (-22.6% current prices) and a partial recovery in Q2 (-4% in current prices).

With the revenue base shrinking this year, the government is struggling to cap the fiscal deficit (FD) at Rs 12 trillion around 6.5% of a smaller GDP. FD was already Rs 9.5 trillion by end October versus the budgeted Rs 7.96 trillion for the year.

India’s persistent fiscal deficit originates from a mismatch between revenue spend and receipts

Last year total receipts (revenue and capital) were Rs 17.50 trillion. This year total receipts till October are 7.08 trillion. With just five months to go the government is unlikely to mop up more than Rs 15 trillion by March end (an average of Rs 1.6 trillion per month same as last year).

Total expenditure till October is Rs 16.6 trillion. In the remaining five months an average spend of Rs 2 trillion per month (same as last year) will take spend to the budgeted level of Rs 26.86 trillion. The gap between anticipated total receipts (Rs 15 trillion) and budgeted expenditure is around Rs 12 trillion which is the expected fiscal deficit.

FM imposes a hard budget constraint to curb fiscal instability

The big fiscal story this year is the deft way the Finance Ministry has shuffled its priorities and kept a tight leash on low priority expenditure.

Till October, aggregate spend was 56% versus 59% last year on revenue items and 48% versus 60% on capital expenditure. But behind the average numbers there is a story of canny prioritization and steely determination to direct the flow of finance to high priority sectors whilst starving low priority items of expenditure.

The successful adoption of this asymmetric approach should be chalked up as a big plus for political stability emerging from dominant party rule. Coalition governments- driven by their dharma of consensus – usually fail to discriminate between the legitimate demands of ministries and mere political pork.

Alleviating distress in rural areas, caused by the closure of small business, dwindling informal employment and disrupted livelihoods has been given the highest priority. Rural Development had a budget spend of 111% versus 65% last year by October. Similarly, Consumer Affairs and Food Distribution had a budget spend of 103% versus 68%; Agriculture 51% versus 47%, Fertilizers 85% versus 84%, Panchayati Raj 38% versus 21% and Food Processing 43% versus 37%.

The second priority, understandably in these perilous times, has been on Health services where the budget spend was 70% versus 58% last year and Pharmaceuticals 64% versus 53% last year.

The extent of selectivity and compression of non-critical spend is illustrated by the spend in Defence being just 56% versus 69% last year and similarly, in Home Affairs just 50% versus 65% last year. Squeezing, the external and domestic security ministries, which are central to the BJP’s vision of a strong government, is a big concession to practicality.

Expectedly, spend on road infrastructure has been retained at 59% versus 63% last year and Railways 52% versus 57%.

All other ministries have faced significant cuts as illustrated best by the Power ministry spending just 32% versus 79% last year, Petroleum and Gas spending 52% versus 87% last year and Housing and Urban Affairs spending 39% versus 51% last year. These ministries implement high profile BJP programs. But clearly the priority this year is to alleviate suffering rather than build for the future.

Some priority areas slip through the cracks

Sadly, capital expenditure has taken a hit this year with spend just 48% of budget versus 59.5% last year. Special efforts should be made to spend the additional Rs 2.15 trillion required to reach the budgeted target of Rs 4.12 trillion.

Priority must be accorded to sectors which have a multiplier effect on jobs, livelihoods or cater to strategic needs. These have a combined incremental requirement for capital expenditure of Rs 1.7 trillion- Surface transport, Railways and Housing need a combined incremental spend of Rs 830 billion; Department of Space and Atomic Energy – Rs 110 billion; Defence -Rs 500 billion and Department of Telecom -Rs 240 billion.

The pattern of spending which has emerged under fiscal stress should serve as a guide to slash the infructuous expenditure embedded over the years of coalition governments. Coalitions use budget allocations to generate political glue rather than base them on a rational prioritization of sector need.
The Covid downturn is an opportunity for government to rationalize its expenditure outlays and focus on its core mandate. Losing fat is torturous. But getting rid of the bad cholesterol clogging the arteries of the State is better done now than later.

Also available at TOI Blogs December 30, 2020

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