New Delhi: The Ministry of Finance is working on fresh expenditure curbs effective second quarter of the ongoing 2020-21 fiscal as it looks to prioritise expenditure on account of falling tax revenues amid the nationwide Covid-19 lockdown.
These curbs will be along the lines of those prescribed by the ministry in the first week of April, but may factor in fund requirements to coincide with economic revival, said a finance ministry official who did not wish to be identified.
For instance, if economic activity resumes, then some ministries like those related to infrastructure may get priority and face lesser spending restrictions, the official said.
These may include ministries like road transport and highways and housing, the official said, adding that a final decision will be taken only closer to the beginning of the second quarter.
The official added that the graded three-tier approach may be followed this time around as well with most ministries asked to limit their half-year expenditures to 30-40 per cent of the full year budgeted numbers.
What the Q1 curbs looked like
In the expenditure curbs placed in the first quarter, ministries like health and family welfare, pharmaceuticals, food and consumer affairs, rural development, civil aviation, railways, and textiles, which were at the forefront of the Covid-19 battle, were allowed to spend as per their requirements and without any limits.
These ministries may be allowed to spend without restrictions in the second quarter as well depending on how the pandemic evolves, said the finance ministry official quoted above.
Ministries like defence, home affairs, petroleum and natural gas and roads transport and highways were asked to limit their quarterly spending to 20 per cent of the full-year budget targets.
The sharpest expenditure curbs were seen by ministries like higher education and school education, skill development, housing and drinking water and sanitation, which were allowed to spend only 15 per cent of the full year budget allocations in the first quarter, along with monthly curbs of 5 per cent.
The cash flow issue
The cuts have been necessitated on account of a sharp contraction in tax and non-tax revenues that has left the Narendra Modi government with a massive cash flow problem. The government plans to borrow an additional Rs 4.2 lakh crore from the markets in 2020-21 but economists forecast that most of the additional borrowing will be equivalent to a fall in revenues.
Tax revenues have been worst hit and are unlikely to meet budget estimates with the Indian economy forecast to contract in 2020-21.
N.R. Bhanumurthy, professor at the National Institute of Public finance and Policy, said the government’s focus should be to step up spending in sectors that provide large employment.
“Construction is one activity that provides large scale employment. And so does the micro, small and medium enterprises,” he said, adding that the government should look to readjust expenditure without compromising spends in important sectors.
“If there is a decline in the overall government expenditure, it will be counter-productive to growth,” he said.
With private consumption falling over the last few quarters, government consumption expenditure has helped in sustaining GDP growth, he said.