FCI Past Dues Added 0.7-0.8% To Fiscal Deficit: Expenditure Secretary TV Somanathan
The government’s decision to clean-up its accounting by bringing the dues of Food Corporation of India on to the main budget added about 0.7-0.8% of GDP to the fiscal deficit for FY21.
A substantial part of FCI’s dues have been cleared, TV Somanathan, expenditure secretary to the Government of India, told BloombergQuint in an interview. Somanathan later clarified that about Rs 1.5 lakh crore has been repaid this fiscal and another Rs 70,000 crore of these dues will be cleared in FY22. At the end of FY22, the pending dues of FCI from the National Small Savings Fund will come down to Rs 59,000 crore, he said.
The decision to bring these dues into the budget follows an acknowledgment that these FCI borrowings are a part of core government expenditure, Somanathan said. They differ from borrowings of an organisation like the National Highway Authority of India, which has its own operations.
What we have done this year is remove resort to extra budgetary resources for core government activities. We have made a nominal provision of Rs 30,000 crore in next year’s budget which is unspecified and kept as a possible requirement....The thought behind this was that it’s better to accurately reflect the numbers as they are. It’s better for us, better for markets, better, ultimately, for everyone.TV Somanathan, Expenditure Secretary, Government of India
Excluding the accounting impact of these past dues, the fiscal deficit would have settled at 8.7% of GDP, which is still much higher than what economists expected, Somanathan said.
The government had been criticised for keeping a rein on spending even though the Indian economy contracted by 24% in the first quarter of FY21. While government spending was low in the first two quarters, it has picked up sharply in the third quarter.
Overall, the expenditure-to-GDP ratio is set to rise to 17.7% in FY21.
Part of the increased spending is because of higher-than-budgeted subsidies on account of the food transfers provided amid the Covid-19 crisis. This cost the government Rs 1.3 lakh crore, Somanathan said. This would have taken the food subsidy bill from the budgeted Rs 1.2 lakh crore to Rs 2.5 lakh crore. The remaining part of the revised estimate for food subsidies of Rs 4.2 lakh crore “is the element of recording liabilities which were earlier with the National Small Savings Fund that have not been taken on budget”.
Shifting Expenditure Patterns
Budget 2021 also marked a shift in expenditure priorities from revenue expenditure towards capital expenditure.
Capital expenditure as a share of GDP will rise to 2.5% in FY22, reflecting year-on-year growth of around 26%. “This would be the highest capital spending ratio since fiscal 2007 and would contribute to potential GDP growth over the medium term through the development of physical infrastructure,” Moody’s Investors Service said in a note on Feb. 3.
The growth of capital expenditure in FY22 is 34.5% compared to FY21’s budget estimates and it will be more than twice the rate of growth of the aggregate budget, Somanathan said. The intent is to continue to focus expenditure on productive infrastructure and add as little as possible in recurring expenses, he said.
Revenue expenditure in FY22, however, may be lower than in the soon-to-conclude fiscal year. This squeeze in the expenditure is due to disappearance of Covid-19-related provisions this fiscal and it gives the government space to move towards capital expenditure, he said.
Commenting on concerns raised about lower expenditure on nutrition-linked schemes, he said this reflects uncertainty around school programmes due to Covid disruptions. In the case of lower-than-anticipated allocation to the flagship rural jobs guarantee scheme, Somanathan said more funds will be provided if necessary.
“The lower allocation towards MGNREGA scheme is on the assumption that we don’t have a pandemic next year,” he said. “If there is an additional demand, the government will augment it next year.”
Debt-To-GDP: Where To?
The pandemic, a resultant rise in borrowings and fall in GDP growth have meant that India’s debt-to-GDP ratio will likely zoom past 80% in the current fiscal.
Both the Union Budget and the 15th Finance Commission report, which was released simultaneously, don’t speak of a debt-to-GDP target for India. The previous Fiscal Responsibility and Budget Management Act review committee had recommended a 60% debt-to-GDP target.
“One thing is certain that we will not be at 60% (in terms of debt-to-GDP ratio). The general government deficit (states and Centre combined) will be around 14 per cent and a declining GDP will impact the ratio,” Somanathan said. “It will be upwards to 80% definitely.”
The 15th Finance Commission had recommended bringing down the central government fiscal deficit to 4% by FY26. Finance Minister Nirmala Sitharaman, however, in her budget speech, said they would target to bring it down to below 4.5% by then.
Somanathan said the Commission’s mandate is to determine the flow of resources to the states. “Even in the Constitution, the finance commission is not required to decide the budget of the central government. In this case, we had made a special request to the commission to make a recommendation (on fiscal deficit) and we are giving it a weight it deserves.”
The commission has recommended setting up a high-powered inter-governmental group to reset the targets prescribed under the FRBM framework.
Watch the full conversation below: