Growth spending
Govt must push capital expenditure
The Union government accounts for October, released on Tuesday, showed that the government remains in a comparatively better fiscal position. But the situation can change considerably in the remaining part of the fiscal year. Backed by better-than-expected revenue collection, the fiscal deficit for the Union government at the end of October was at 36.3 per cent of the budget estimate, compared to 119.7 per cent during the same period last year. The total revenue receipts were over 70 per cent of the budget estimate, compared to about 34 per cent in the same period last year. Since the last fiscal year was not a normal year as India was struggling with intermittent lockdowns at various levels to contain the spread of Covid-19, which affected economic activity and revenue collection, comparing the numbers with a prepandemic year would be more appropriate. Even in this context, fiscal performance in the current year is remarkably better.
In terms of expenditure, the government has spent 53.7 per cent of the budgeted revenue expenditure, which is marginally lower compared to the last fiscal year. Capital expenditure of the government reached only 45.7 per cent of the budgeted amount, which is a slight disappointment, though it’s a proportion of a larger capital expenditure budget. In absolute terms, capital expenditure has gone up by over 28 per cent. The government will need to press this pedal further to accelerate the pace of economic recovery. Gross domestic product (GDP) data for the second quarter of the ongoing fiscal year, also released on Tuesday, showed that economic activity in real terms only managed to reach the level witnessed two years ago. The numbers also showed that private consumption was still lower than the level attained two years ago.
Therefore, it is important that the government spends the budgeted amount on capital expenditure. The expectation until a few months ago was that it would be in a position to spend more on capex. But the condition is changing. Some estimates now suggest that the government might actually miss the fiscal deficit target of 6.8 per cent of GDP because of additional expenditure. It has, for instance, extended the distribution of free food grains till March next year, which will entail an additional expenditure of over ~53,000 crore. With the extension of the scheme, the government would spend an additional ~1.47 trillion on food subsidies in the current year.
Furthermore, the government will need to significantly increase the allocation for the rural job guarantee programme as the funds have been exhausted. Besides, it has to find funds for additional fertiliser subsidies and paying arrears for export incentives. Thus, while there has been a surge in tax collection, the government is also incurring large additional expenditures. In terms of overall fiscal management, another factor that will work in the government’s favour is higher nominal growth, which is not only increasing revenue but will also push up the size of the economy and help contain the deficit as a percentage of GDP. The priority for the government for the rest of the year, however, should be to complete its capital expenditure programme. The overall expenditure declined in October, which hopefully would get reversed. This would be critical as the new strain of the virus could pose risks to economic recovery.