This has forced some ministries and departments to delay payments under their schemes – a few even to the next financial year. Economists said expenditure compression could dent economic recovery.
“The message is clear… Spending (should be) within the revised estimates with focus on essential activities,” said a government official.
Better tax mop-up
With a pickup in tax collections improving the cash position, quarterly restrictions on spending by ministries and departments have been relaxed. But overall expenditure will need to be within the revised estimate (RE). “Ministries have been told to stick to RE,” the official said.
Typically, the finance ministry revisits budget allocations for an ongoing financial year when it begins work on the next budget. However, this year’s discussions have been held in the shadow of Covid-19 and factored in several sets of reforms as well as financial support through four packages to provide relief to stressed sectors and vulnerable groups, and spur a turnaround.
The government’s cash flow situation in the first quarter had come under severe pressure, prompting it to announce cash-management measures and restrictions on quarterly spending, depending on the urgency.
It also raised the gross market borrowing target for this fiscal to Rs 12 lakh crore, from Rs 7.8 lakh crore estimated in the budget, attributing the increase to the coronavirus outbreak that stalled the economy.
Health expenditure, additional spending on account of government packages and some defence purchases in view of the situation at the border received top priority.
Another official said the reduction in allocations is also dependent on utilisation of funds by a ministry. Of the total BE of Rs 30.42 lakh crore, only 48.6% had been spent in the first six months.
The newly-created ministry of jal shakti has spent only 33% of the allocated budget of Rs 30,000 crore, while the ministry of power spent 28% of the allocated Rs 15,000 crore up to September, as per data from the Controller General of Accounts. The ministry of rural development had to seek additional allocation for the employment guarantee scheme and other programmes within its ambit, having exhausted its entire allocation of Rs 1.22 lakh crore.
“Some funds, such as that for travel, have not been used,” the second official said. “Establishment costs have also come down… Some schemes have also not seen much utilisation.” Ministries can’t spend more than 33% of the allocated amount in the third quarter, according to norms.
Impact on growth
Economists said the healthy pace of expansion of government spending in the June quarter prevented an even sharper fall in GDP in the lockdown quarter, but has slowed since then.
“With expenditure management measures put in place, momentum reversed in the second quarter, with a contraction in total expenditure, despite the multiple rounds of fiscal stimulus announced so far,” said Aditi Nayar, principal economist, ICRA.
The agency fears this contraction may have curbed economic recovery in the second quarter. In its weekly tracker released on Wednesday, Nomura said expenditure compression is a risk to recovery. ICRA estimates the fiscal deficit at 7.4% of GDP in FY21, as against the government’s budget estimate of 3.5%.