Budget 2020: Government’s Austerity Drive - Where Can It Cut Spending?
The central government, faced with lower-than-projected revenue growth amid a weak economy, is asking ministries to curtail spending in the final quarter of the current financial year. By doing so, the government is trying to keep its fiscal deficit as close to the budgeted 3.3 percent of GDP as possible after missing its target last fiscal year.
The Finance Ministry, last week, wrote to government departments asking them to cut spending in the January-March quarter to 25 percent of the budget estimate as against an earlier cap of 33 percent. The decision was taken based on the “current fiscal position”, the finance ministry said. In total, the government is looking to trim spending by about Rs 2 lakh crore in the final quarter of the financial year, a person familiar with the matter said. Bloomberg News first reported the projected expenditure cuts on Dec. 31.
The spending cuts had been forced by a material shortfall in revenue growth. Tax revenues till November-end were up just 1 percent over last year compared to the budgeted increase of about 18 percent, according to data released by the Controller General of Accounts. Divestment receipts too have fallen short. The government has so far raised Rs 17,364 crore and is likely to miss this year’s divestment target of Rs 1.05 lakh crore by a wide margin, BloombergQuint reported. That would be largely because the privatisation of Bharat Petroleum Corp. Ltd. isn’t expected to take place by March 31.
Where Is The Room To Cut?
The attempt to curtail expenditure comes in the last quarter of the financial year, when a significant portion of budgeted spending has already been incurred. In particular, in recent years, the government has front-loaded spending after pushing forward the budget presentation to February.
So where does the government have much room to prune expenditure?
Data available on the CGA website shows most ministries have spent less than three-fourths of their budget allocation in the first three quarters of the financial year. This includes large spenders like the Ministry of Agriculture, Ministry of Road Transport and Highways and Ministry of Consumer Affairs, Food and Public Distribution.
For instance, as on Nov. 30, the Ministry of Agriculture and Farmer’s Welfare had spent only half of its budgeted allocation of Rs 1.38 lakh crore. This could primarily be on account of lower-than-budgeted disbursals under the PM-KISAN farm income support scheme. Out of the Rs 75,000 crore allocated under the scheme, disbursals made to farmers this year add up to Rs 44,256 crore—leading to sizeable saving for the government.
The Ministry of Consumer Affairs, Food and Public Distribution has spent 69 percent of its allocation. A large spend under this ministry is the transfer of food subsidy to the Food Corporation of India Ltd. In previous years, as pointed out by the CAG, the government has delayed the transfer of this subsidy and allowed the FCI to borrow to meet its funding needs.
Among ministries that undertake large capital expenditure, the Ministry of Road Transport and Highways has spent 63 percent of its allocated Rs 83,015 crore as on Nov. 30, 2019. The Ministry of Railways has spent 60 percent of its allocation, while the Housing and Urban Affairs Ministry has spent 58 percent of its budget.
This might be due to project-related delays or could be because the Finance Ministry hasn’t released funds to line ministries, said NR Bhanumurthy, a professor at National Institute of Public Finance and Policy.
To Spend Or To Cut?
The attempt to cut government spending to meet a pre-set budget deficit target comes at a time when GDP growth has fallen to a six-year low. With effectiveness of monetary policy limited, many have called for government spending to support the economy.
Economists believe a fine balance will need to be struck to maintain fiscal prudence while ensuring that growth is not hurt further.
“There might be scope to pursue expenditure efficiency, by cutting overlapping programmes and duplication and concentrating spends on projects that will have an effect on growth revival,” said Saugata Bhattacharya, chief economist at Axis Bank Ltd. While large expenditure might have been needed to provide a growth stimulus, this must be balanced by considerations of excess market borrowings, given revenue constraints, and a consequent increase in borrowing costs, he said.
The government must make a shift from consumption expenditure to capital expenditure despite government consumption expenditure aiding growth in July-September, Bhanumurthy said.