The government has extended its expenditure rationalisation for the second quarter of this financial year, giving rise to concerns that it may end up spending much lower than the budgeted levels resulting in a long drawn economic recovery.
Lower revenue stream and the rising debt levels of central and state governments on account of enhanced borrowing to deal with the COVID-19 pandemic-related expenditure have also led to concerns of the debt-GDP ratio breaching the notional red line of 80 per cent from the levels of 70 per cent seen last fiscal. The concerns are, however, being questioned by some economists who emphasise on the need to concentrate on economic revival and growth rather than being solely focussed on the debt numbers, with the economic costs of reining in debt being seen high in terms of unemployment and loss of lives and livelihood.
*Why this expenditure rationalisation?*
The Finance Ministry last week released guidelines for expenditure control in the July-September quarter, extending an earlier order dated April 8 for cash management system. The April order had categorised government departments and ministries into three, outlining their spending quota for the April-June quarter. Category A has ministries and departments such as Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry of Civil Aviation, Department of Health and Family Welfare, Department of Rural Development and Supreme Court of India with no restrictions. Ministries and departments in Category B such as those related to fertilisers, taxes, home affairs, election commission and road transport and highways are required to restrict expenditure within 20 per cent of the Budget estimate of 2020-21, while those in Category C such as petrochemicals, coal, commerce, telecommunications, culture, housing and urban affair can spend only 15 per cent of the budget estimate.
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The expenditure rationalisation is being done presumably to allow enough headroom to dovetail the stimulus package announced last month, especially as revenues are expected to be sharply lower than estimates this year. Direct taxes have declined by over 25 per cent in the first quarter, while GST collections have been only 45 per cent of the monthly target. Economists point to several key elements of the stimulus package such as the distribution of funds to Micro, Small and Medium Enterprises under the 100% Emergency Credit Line Guarantee Scheme struggling to take off, thereby worsening the impact of the government expenditure compression that is currently underway.
*What are the problems with limiting cash outgo?*
The government’s fiscal stimulus in the wake of the COVID-19 pandemic has been restrained with limited cash outgo. Schemes that were part of the stimulus package such as the distribution of funds to Micro, Small and Medium Enterprises under the 100% Emergency Credit Line Guarantee Scheme are struggling to take off, with banks managing to disburse a little over 7 per cent of the amount earmarked under this head over the last one month. For MSMEs, hit hard by the pandemic lockdown, credit continues to be a challenge amid the slump in demand. Official data shows that as of June 18, state-owned banks sanctioned loans worth Rs 40,416 crore under the scheme, of which Rs 21,028.55 crore has been disbursed, which is a little over 7 per cent of the Rs 3 lakh crore package under this head.
Several rating agencies and economists have projected the debt-GDP ratio rising to 84-85 per cent of the GDP. Even as debt sustainability and fiscal consolidation are always a matter of concern, some economists point out that holding down debt levels should not compromise on GDP growth, for which government expenditure is essential. An aggressive fiscal policy at this juncture is being seen as necessary for economic revival, with some economists emphasising that since the revenue slippage estimates are already high, fiscal deficit is anyway going to get pushed to significantly higher levels.
*What are rating agencies likely to look out for?*
The tight control over fiscal policy is being seen driven by the concerns of the debt levels, possibility of exceeding fiscal deficit target by a huge margin and the consequent actions by rating agencies. More than the deficit, though, rating agencies are watching the deterioration of India’s fiscal metrics in ‘the context of a prolonged or deep slowdown in growth’, which “would invite a ratings downgrade”, as ratings agency Moody’s warned in their note on India’s outlook on May 8. The effort to revive growth, thereby, is a more crucial metric given that practically all countries are bracing for a worsening of their respective deficit positions. The IMF’s latest projections for debt numbers, published in April, showed that debt-GDP levels are expected to worsen for almost all emerging markets this year.
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