View: Despite appearances, Budget 2021 effectively continues to follow a conservative fiscal path

Economy


One of the most enigmatic elements of GoI’s approach towards the Covid-19 pandemic has been its dogged conservative approach towards fiscal management this year. We have seen how in the first half of 2020-21, when the economy was ravaged the most by Covid, central government spending was lower than it was in the corresponding period of the previous year. This was perplexing, to say the least, as that was when the economy needed the greatest help through increased government spending.

Then, in the third quarter, GoI finally loosened its purse strings. Government spending in October, November and December 2020 was 9.5%, 48.3% and 29.1% higher respectively, compared to the corresponding months of 2019. As a result, government spending in the first three quarters of 2020-21 was cumulatively 8.1% higher than it was in the same quarters of 2019-20.

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When the Wallet Opened

On Monday, Finance Minister Nirmala Sitharaman told us in her budget speech that 2020-21 will end with government expenditure growing by a much larger 28.4%. Given a growth of just 8% till the end of three quarters, that leaves a huge task for the last quarter. Nevertheless, it would be a spend that could apparently do some justice, although belatedly, to the pandemic-infected year. Note that the central government spending grew by 24% in the global financial crisis year, 2008-09. The lockdown is much worse than a financial meltdown and, therefore, justifies a bigger spend.

Interestingly though, the finance minister’s speech did not betray any policy stance to indicate that GoI had finally decided to spend its way out of the pandemic. Understandably so, because there is a catch. The government is not going to increase spending by 28% as the numbers suggest. The growth is likely to be 17%, if we compare apples to apples, and if we are lucky.

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First, we deal with the problem of apples-to-apples. The government had budgeted an expenditure of Rs 30.4 trillion in 2020-21. This is raised to Rs 34.5 trillion in the revised estimates. This increase is essentially because GoI has made a provision of food subsidy in 2020-21 for discontinuation of National Small Savings Fund (NSSF) loans to the Food Corporation of India (FCI).


Can’t Spend Your Way

According to data released by the Controller General of Accounts (CGA), GoI had spent Rs 1.25 trillion on food subsidy by December 2020. Revised estimates presented by the FM in the budget session suggest that it would spend Rs 4.22 trillion on food subsidy in the full year. This large increase of nearly Rs 3 trillion in the last quarter seems to be arising out of a one-time settlement of FCI’s borrowings from NSSF. This is, in reality, not an expenditure of 2020-21, but a settlement of past dues of the government. It increases government borrowing, but it does not increase spending in a sense that could spur demand.

If we, therefore, reduce this Rs 3 trillion of settlement from the revised estimate of Rs 34.5 trillion, we get a more comparable expenditure estimate for 2020-21. This, at Rs 31.5 trillion, works out to a far more modest increase in government spending in 2020-21 at 17.3%.

But we will have to be very lucky to achieve even this level of growth in government spending, because the record till December 2020 is only 8%.

To achieve the 17.3% growth in the year, the government needs to increase its spending over the last quarter of 2019-20 by nearly 51%. This could be very difficult.

The above calculations that adjust the 2020-21 government spending numbers also imply that the growth in government spending in 2021-22 will not be flat as the government numbers show, but they would be 10.6% higher than the adjusted numbers of 2020-21. Government spending of the order of 10-17% during the worst economic crisis in a lifetime is underwhelming.

GoI effectively continues to follow a conservative fiscal path. Interestingly, it is conservative even as it has turned somewhat honest in admitting part of its past profligacy. It has let the fiscal deficit rise to realistic but hitherto unimaginable levels.

GoI seems to have noticed that the economy rebounded in the second quarter without it having to spend anything extra to get that growth. It does not seem to see a justification to increase its spending if it can get growth for free. The enigma then is, how does one get growth for free? Without raising taxes for the rich and without providing any more for the poor.


The writer is MD-CEO, Centre for Monitoring Indian Economy (CMIE)



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