FRUGAL GOVT MAY CRIMP GROWTH

Private investments yet to pick up in India

The government’s expenditure has contracted in the first four months of the current fiscal year, despite a surge in tax collections pushing up revenue. This may crimp economic growth since private investments are yet to pick up. For instance, revenue from taxes has grown 160.9 per cent in the first four months of FY22; its spending has shrunk 5 per cent, compared to the corresponding period last year.

The government's expenditure has contracted in the first four months of the current fiscal year (2021-22, or FY22), despite a surge in tax collections pushing up revenue. This may crimp economic growth since private investments are yet to pick up.

For instance, the government’s revenue from taxes has grown 160.9 per cent in the first four months of FY22; its spending has shrunk 5 per cent, compared to the corresponding period last year (2020-21, FY21).

In fact, tax collections at ~5.3 trillion in April-july were 56 per cent higher than the 2019-20 (FY20) levels; total expenditure was 6 per cent higher than pre-covid levels.

Tax collections pushed up the total revenue of the government to ~6.8 trillion during the first four months of FY22 - higher by 193.4 per cent over the corresponding period in FY21. In fact, collections were also 70.9 per cent more than April-july of FY20.

In the first four months, revenue expenditure at ~8.7 trillion was 4 per cent lower than FY20. Revenue expenditure shrunk 7 per cent in the first four months of FY22, compared to last year.

Revenue expenditure comprises fixed obligations or ongoing operating expenses, such as salaries and pensions, but it helps create demand.

Besides, it is the interest payments under revenue expenditure that are growing, posting 14 per cent growth over last year. Excluding interest payments, revenue expenditure was, in fact, 13 per cent lower than last year and 1 per cent lower than FY20.

Capital expenditure (capex) by the government was, however, 15 per cent higher in April-july, compared to last year and 19 per cent higher than FY20.

However, the government's capex declined 39.4 per cent to ~16,912 crore in July, compared to the same month the previous fiscal year. It was down 62 per cent, compared to July FY20.

The Union Budget for FY22 provided a capital outlay of ~5.54 trillion a sharp increase of 34.5 per cent over the Budget Estimates for FY21.

“The tax collections are big, compared to 2019 levels, whereas there is only a small increase in government spending. One would have expected the government to spend more, given the pandemic shocks,” said Pronab Sen, former chief statistician of India and country director, International Growth Centre, adding, “The bigspend announcements are not showing up. The recovery we have seen is not because of the government but because of the private sector.”

He added it is the resilience of the Indian economy that seems to have helped it tide over the pandemic.

India’s gross domestic product (GDP) grew 20.1 per cent on-year in the April-june quarter of FY22, but was 9.2 per cent lower than the levels attained in the first quarter (Q1) of FY20.

“The increase in tax collection is worrisome because the non-formal sector has lost significant market share to the formal,” said Sen.

“While it is good news for GDP in the short run, it is bad news for employment in the long run. Here, the responsibility rests firmly with the government. If the Centre doesn’t step up its spending programme, private drive could taper off,” cautioned Sen.

A part of the revenue expenditure is interest obligation and subsidy. Reining them in is often regarded as prudent fiscal management. Revenue expenditure, excluding subsidies, shrunk 9 per cent in the first four months of FY22, compared to April-july of last year. Non-interest, non-subsidy revenue expenditure contracted 17 per cent over this period.

Aditi Nayar, chief economist, ICRA Ratings, said the contraction in the non-interest non-subsidy component of the government’s revenue expenditure is a cause for concern. “Faster spending will help to deepen the recovery underway, as displayed by various high-frequency indicators, and instil greater confidence.”

Devendra Kumar Pant, chief economist, India Ratings & Research, said a contraction in the government’s final consumption expenditure — at a time when both private consumption and investment are struggling to provide support to growth — is “very perplexing”. “Due to weak demand conditions, investors are still not ready to invest, and private expenditure is growing slowly due to job losses and salary cuts,” said Pant.

Gross fixed capital formation in Q1FY22 was 17 per cent lower, compared to the corresponding quarter of FY20.

Private final consumption expenditure, which denotes demand, grew 19.3 per cent in Q1 on-year, but is nearly 12 per cent lower than Q1FY20.

Madan Sabnavis, chief economist, CARE Ratings, said a second lockdown threw a spanner in the government spending works. “Most are still announcements,” he said.

He added there was also less relief expenditure this year, unlike last year when the Mahatma Gandhi National Rural Employment Guarantee Act was decidedly high.

However, a senior finance ministry official argued that last year’s base was not a normal one owing to pandemic-specific expenditure incurred, including transfers to Jan-dhan accounts, Employees’ Provident Fund Organisation payments, and certain subsidies.