India To Meet Spending Targets Despite Revenue Squeeze, Says Expenditure Secretary: Exclusive
Expenditure Secretary TV Somanathan said the central government will keep up its spending and increase it, if needed, even as tax collections collapsed because of the pandemic-driven economic contraction.
“The central government expenditure will be sustained, and we will certainly hit our budget targets regardless of the crunch in revenue,” Somanathan told Bloomberg Quint in an interview on Tuesday. The government has constraints and these need to be managed, he said.
A reprioritisation of spending has been done by the government, and there’s been a “huge” increase in allocation for food, rural development, health and transfer to states, he said. The priority, according to him, has been to spend on activities that have high multiplier effect in the economy.
Spending will be increased as the need arises, he said. “How much expenditure will be increased, we will have to see as and when it comes.”
The commitment to spend comes when the government’s revenue is strained as tax collections tumbled because of the lockdown and Asia’s third-largest economy contracted nearly 24% in April-June, the worst among large economies.
Somanathan said the contraction in GDP for April-June wasn’t a surprise, and was anticipated. The government knew there’s going to be a big contraction, and the April-June data isn’t a big input for government’s policy making in September, he said. “Unfortunately, we don’t have the luxury to wait for the statistics, we have to drive this thing in the fog.”
Capital expenditure has been the government’s priority due to its multiplier effect on the economy, Somanathan said. The government has ensured budgetary resources are not a constraint on its capital expenditure.
“We are making sure that capital expenditure doesn’t get delayed for want of budgetary support,” he said.
In April-July, the government’s capital expenditure was 27% of the budget target of Rs 4.12 lakh crore against a 32% of the target achieved last year, according to CGA data.
The central public sector enterprises are also attempting to maximise capital expenditure and shovel-ready projects are being prioritised, Somanathan said.
The Finance minister has had three meetings with public sector companies to review their capital expenditure, he said. PSUs are going as fast as they can, but are facing difficulty in some cases to restart work on projects due to health related constraints, he said. Finance Minister Nirmala Sitharaman had asked PSUs to spend 50% of their capex target by end-September.
“There we have pressed the accelerator to the floor as much as we can, but even if we press the accelerator, the fuel isn’t getting transmitted fully.”
Here are the key highlights from the interview:
- No question that central government is the last resort of the economy in a crisis.
- Saw expenditure grow 11% in the first quarter against the backdrop of a precipitous drop in revenue.
- Classified the ministries into three categories to better manage government spending.
- Consciously re-prioritising spending for maximum impact.
- This is not a situation where you can create five-year plans.
Transfers To States
- Transfers to states this year in the first quarter were 35% higher than last year.
- Under the finance commission, we are supposed to pay 41% of central revenues to the states. What we've done in the first three months of the year is that we have paid 41% of the budget estimate of revenue and not 41% of what we collected in the first quarter.
- That was a deliberate and a conscious strategy because we understand have to keep performing in this economy to keep things going.
- We deliberately released money on the basis of the budget estimates even though we knew, on the first of April, that the budget estimates were completely unrealistic because of the lockdown on March 22.
- “GST Council discussions in December 2016 and January 2017 had discussed a scenario similar to where we are right now.”
- Finance minister at the time had clarified that states' compensation can only be paid from cess.
- Raising cess is not an option right now.
- This is not something that the government has imagined now.
- Not in breach of the promise that we have made.
- Liable to pay compensation for shortfalls in GST collections.
- Still in discussions with states for a solution.
- Took last year's actual GST collection and inflated it by 10% to arrive at the shortfall figure.
Funding GST Borrowing
- Not implying that the RBI will directly buy state securities to provide funds.
- Will coordinate and assist such a borrowing to ensure that the states get the best rate possible.
- Looking at a structure where state bonds could be securitised against future cess receipts.
- Do not prefer the alternative of central government directly borrowing from the RBI.
Direct Monetisation To Meet GST Shortfall
- Purely on economic merits and academic point of view, there is merit to direct monetisation.
- But this is something to be considered by the central bank and government officials concerned.
Watch the full interview here: