Decoding the dip in public expenditure
Typically, when a crisis hits, the expectation is that the Centre — which has more revenue-raising abilities than states — will take the lead in preparing a fiscal road map, loosen its purse strings and raise expenditure significantly. The Covid-19 pandemic is unprecedented in its scale and impact. But this is also when the government is needed even more.
In the initial period when relief measures were the need of the hour, this required ensuring adequate social safety nets. Now, as the economy is opening up, for its multiplier effect on growth, priority needs to be given to infrastructure investments by increasing capital expenditure. The Centre has announced several stimulus packages aimed at doing just that. Unfortunately, a look at the data suggests a difference between rhetoric and reality.
First, despite announcements of over ₹20 lakh crore in fiscal packages, total expenditure till October this year increased by only ₹6,550 crore when compared to the same period last year. In fact, as a proportion of its initial Budget Estimate (BE), actual expenditure is lower by five percentage points than the same period last year. A deep-dive into the ministry-wise expenditure data shows that, in terms of the total quantum of funds spent, a staggering 41 out of a total 55 ministries spent less this year till October, compared to last year. The fact that the Gross Domestic Product (GDP) contraction was less severe in the September quarter than in the first quarter is not because of increased public expenditure, but despite reduced expenditure.
Second, low revenues necessitated a repurposing of expenditure. Areas considered essential for dealing with the pandemic such as health, rural livelihood and the public distribution system (PDS) were prioritised. Expectedly, the corresponding ministries constitute nearly 20% of the total central expenditure. But there are some puzzles here too.
There remains little doubt that there is an urgent need to expand and universalise the PDS to deal with the severity of the income and hunger crisis. A recent survey conducted by Hunger Watch across 11 states and covering 4,000 respondents found that more than half the surveyed households had no income source since April. As many as 62% households reported reduced incomes. Yet, the department of consumer affairs and public distribution, which is responsible for subsidising foodgrains, till October, spent 9% less this year than in the same period last year. If past trends are anything to go by, further downward adjustments may be seen by the end of the fiscal year.
This decline — despite measures to increase PDS entitlements and expand coverage to include 80 million migrant workers — suggests one of two things. Either the Centre has not paid the Food Corporation of India (from where the grains for the public system are procured) its dues, thereby increasing its debt burden, or the subsidy released to states which have opted for decentralised procurement has been cut, adding to the burden on state finances.
Similarly, while additional allocations of ₹40,000 crore have been made for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), and this is a welcome step, the scheme is still struggling to meet current demand. As of today, 10 million fewer households have been provided employment than demanded. In fact, with nearly four months remaining in the fiscal year, the relevant ministry is running out of even the additional allocations.
Third, capital expenditure plays a key role in promoting growth, but this, too, is not showing a significant increase. In fact, only 47.9% of the year’s target (or BE) has been spent till October, as against 59.5% in FY 2019-20. This expenditure includes loans disbursements, which have naturally seen a substantial rise this year. Even ministries that have large infrastructure-related projects such as the ministry of jal shakti and the ministry of housing and urban affairs have seen over 20 percentage points less expenditure than in the corresponding period in the past.
For states, the Centre‘s failure to increase its expenditure spells trouble twice over. Over the years, the Centre has systematically encroached on areas traditionally under the domain of states, including education, health, nutrition, employment, agriculture, through a steady expansion of Centrally Sponsored Schemes (CSSs). For fiscally weaker states, these funds, despite the conditions attached to accessing them, have become an important source of non-wage finances. As states spend on welfare provisioning through CSSs, their dependence on the Centre has also increased. Simultaneously, lower tax devolution to state governments has hampered their own ability to increase expenditures. Till October, states had received 19% lower funds than they did for the same period last year.
In any country with a federal set-up, and that too one with a centripetal bias such as India, the Centre plays a key role in the social contract between the citizens and the State. Several ground-level surveys along with the government’s own expenditure numbers suggest a failure by the government to live up to its obligations. It’s less than two months to go before the Union government presents its estimates for the current and next fiscal year in Budget 2021. The Centre must present a clear roadmap for the country — one that can balance economic recovery while ensuring redistributive social welfare.