With tax revenue growth lagging the required rate by a wide margin, the Centre is all set to cut the annual budgetary expenditure for the current financial year by nearly Rs2.2 lakh crore or 8% from the budget estimate (BE). The axe could fall on spending across most ministries, though budgeted capital investment may remain intact. With actual expenditure this year likely to be around Rs25.6 lakh crore, or 92% of the BE, the spending reduction from BE level this year could be the sharpest since FY15, when the new Modi 1.0 government retained the (slashed) expenditure level of 92.7% of BE estimated by the previous UPA government in the interim budget (see chart).
While the NDA dispensation has been focused on keeping the headline deficit numbers under check, unlike its predecessor, it has also largely achieved it without effecting huge spending cuts (it is another manner, off-budget financing of committed government expenditure increased sharply during the NDA regime).
The spending curbs being imposed now to avoid a big fiscal slippage would, however, weaken the one pillar of the economy - government expenditure - that has been holding the fort for other constituents of the economy like private investments/consumption and exports that have lost steam.
Notably, the slashing of the Centre's budget spending comes at a time when the state governments have also reined in their expenses in the wake of revenue shortfall. As reported by FE earlier, going by data of 17 large states (notable omissions are Bihar and Assam for non-availability of updated information), states' capex grew a measly 1.4% in April-October this year, compared with a robust 32% in the corresponding period last year.
(OM) issued by the department of economic affairs, dated December 27, states that expenditure in the March quarter of FY20 would be restricted to 25% of BE against the norm of 33% and that spending in March should not exceed 10% of BE compared with the norm of 18%.
"Considering the fiscal position of the government in the current financial year, it has been decided to cap the expenditure in the last quarter /last month of the current financial year," the DEA said in the OM.
The UPA government had also resorted to heavy expenditure reductions to keep the fiscal numbers from going awry in FY13 and FY14, the last two years of its regime. The NDA government hasn’t messed up with its original budget estimates much except in FY15 and again in FY19. In FY15, it retained the interim budget set by the UPA and had later to undertake a big (Rs1,31 lakh crore or 7.3%) reduction in the budget size, the NDA has ensured that the overall budget estimate is not visibly different from the original projections. In FY19, it again trimmed spending by Rs1.31 lakh crore, as tax revenue target missed target by 11%. However, the spending was in large part covered through off-budget spending in FY19.
If the trend of tax receipts in recent years are any indication, then the shortfall in net tax receipts in the current financial year could be as high as Rs 3 lakh crore. In April-November periods of both FY18 and FY19, the Centre had collected 56% of actual net tax receipts while the balance was collected in December-March periods. In April-November this fiscal, it garnered Rs 7.5 lakh crore or 45.5% of the budget estimate for the full year compared with 49.4% of the corresponding target previous year.
With the GST and direct tax revenue falling considerably short, net tax receipts (after mandatory transfers to states) grew just 2.4% in the first eight months of FY20 against the required rate (BE FY20 against FY19 actuals) of 25.3%. The government could, however, again resort to off-budget financing this fiscal unless it receives more non-tax revenues such as AGR dues. The fiscal situation of the Centre has become even more constrained after it became clear that the proposed mega strategic disinvestment of BPCL and ConCor are unlikely to materialise this fiscal due to the lengthy processes involved.
Analysts, including former chief economic adviser Arvind Subramanian, have asked the government to come clean by stating the actual fiscal deficit inclusive of off-budget funding.