Supplementary demand for grants: An explainer

The Centre has presented to Parliament its first batch of supplementary demand for financial grants to be made to various departments. The demand is to spend an additional ~2.36 trillion in FY21.

The Centre presents its annual spending plan two months ahead of the beginning of a new fiscal year. But as the year progresses, the government takes stock of the spending done, the amount that remains to be spent, and considers the new requirements that demand a bigger sum than originally planned. While doing this, it also includes those departments who no longer need the money they had been assigned, or as the case may be, if the Centre is unable to earn the revenue so required. There are three ways to look at this number: one, through its bifurcation into extra cash needed on the one hand, and bonds, borrowings, and savings from other ministries or departments to be used from other purposes, on the other; two, its division into spending that’s already done at this point of time, and the part that is newly announced; and three, expenditure that needs parliament nod and the part that doesn’t.

Cash outgo

From the announced ~2.36 trillion, about 70 per cent, or ~1.67 trillion is the “net cash outgo” for the Centre. This means that apart from the budgeted expenditure, the government needs to account for ~1.67 trillion worth of more funds to take care of enhanced spending on post-pandemic policy response.

This is 5.5 per cent over and above the overall expenditure budgeted for this year, at ~30.4 trillion. And if it is assumed that India’s nominal gross domestic product falls this year as experts are saying, this could well be close to 1 per cent of GDP.

Most of it is to account for extra spending to bolster the health department’s effort to tackle the Covid-19 public health emergency (~8,000 crore), to make possible cash transfers to needy households and strengthen rural employment generation (~73,000 crore), facilitate decentralised grain procurement for food security of the poorest (~10,000 crore), and towards price stabilisation fund that helps tame extreme volatility in prices of essential consumer food items (~6,000 crore).

The remainder of nearly ~69,000 crore worth of funds is taken care of from savings of various ministries or departments after assessing that they no longer need that much of money, or through enhanced receipts or recoveries.

The biggest item under this is ~40,000 crore worth of spending towards providing excess rural employment for migrants and construction labourers whose work avenues vanished due to the pandemic. This provision has been made either through enhanced borrowing, or using funds from other departments, the clarity on which is not divulged in the government release.

The second important provision is the ~20,000 crore worth of recapitalisation of public sector banks. PSBS are reeling from a severe pressure in their balance sheets due to the economic impact of Covid-19, and according to the RBI’S assessment, their bad loan ratio is set to rise in FY21. This spending would be in the form of special securities sold by the government of India to PSBS, on which the latter will get immediate cash, but pay back principal and interest later.

New or already done?

The government announced a slew of measures to contain the economic losses that the pandemic brought with it. This included the Pradhan Mantri Garib Kalyan Yojana, PMGK Anna (food) Yojana, PMGK Rozgaar Abhiyaan (employment mission), which was targeted to provide financial assistance in the form of cash, free food to the needy rural folk, and more works under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Most of the supplementary grants have already been announced, and also spent, according to experts. The Controller General of Accounts shows a completed spending of ~1.02 trillion in four months by the department of rural development, against the annual (12 months) allocation of ~1.2 trillion (85 per cent). More than half of it is for wages to MGNREGS workers, and about a third, towards cash transfers to women Jan Dhan account holders.

“Most of these provisions are a part of government’s Covid-relief measures, and hence these demands are but a formalisation of the process of incurring these expenses. However, the state deficit grants appear to be outside these announcements, and hence become additional expenditure,” CARE Ratings said in a report.

According to the recommendations of the 15th Finance Commission, the Centre has to provide financial grants to states if the revenue account of states remains in deficit even after devolution—sharing of state’s share in gross tax revenue to them. To account for the revenue loss postdevolution, it has earmarked ~47,000 crore to states. This is the biggest provision that has not been done, and would nearly account for 0.25 per cent of GDP for FY21.

Voted and charged expenditure

Of the ~2.36 trillion worth of additional spending, the Centre would need to take Parliament’s permission to spend only a part of it, amounting to ~1.89 trillion. The post-devolution revenue deficit grant, mentioned above does not need Parliament’s approval according to Article 112 of the Constitution of India.