GOVERNMENT LIKELY TO SPEND MUCH LESS THIS FISCAL YEAR

Rationalisation of expenditure by the government for the second quarter of the current fiscal year has led to rising concerns. Fear’s have plummeted as many believe that the government may end up spending way less than the budget level, it has previously estimated, this would result in the economy taking even longer to recover than before.

Lower revenue intake and rising debt rates of central and state governments due to increased borrowing to cope with COVID-19 pandemic-related spending have also contributed to worries about the debt-GDP ratio crossing the 80 per cent notional red line from the 70 per cent rate seen in the last fiscal period. Nevertheless, the worries are being challenged by some analysts who stress the need to focus on economic recovery and prosperity instead of relying exclusively on debt figures, with high economic costs of debt reining in terms of jobs and loss of life and wellbeing.

Last week, the Finance Ministry released spending control guidelines in the quarter of July-September, extending an earlier order for the cash management system, dated April 8. The April order had grouped divisions of government and ministries into three, detailing their April-June quarter budget limit. Class A has without limitation ministries and agencies such as the Department of Agriculture, Cooperation and Farmers’ Welfare, the Ministry of Civil Aviation, the Department of Health and Family Welfare, the Department of Rural Development and the Supreme Court of India.

Category B ministries and departments such as fertilizers, taxation, home affairs, election commissions and road and highways are expected to restrict spending to 20% of the 2020-21 budget total, whereas Category C ministries such as petrochemicals, energy, commerce, telecommunications, education , housing and urban affairs will only spend 15% of the budget.

The budget rationalization is likely being undertaken to allow enough headroom to dovetail the stimulus package unveiled last month, particularly when receipts are projected to be significantly smaller than this year’s projections. Direct taxes dropped by more than 25 per cent in the first quarter, though GST collections were just 45 per cent of the monthly mark. Economists point to some key aspects of the stimulus program, such as the allocation of funds to micro, small and medium-sized businesses under the 100 percent Emergency Credit Line Guarantee System that are failing to take off, thus exacerbating the effects of the continuing reduction of government spending.

With insufficient cash outgoing, fiscal support from the government in the aftermath of the COVID-19 pandemic has been constrained. Schemes that are part of the stimulus plan, such as providing funds to micro, small and medium-sized enterprises under the 100% Emergency Credit Line Guarantee Programme, are failing to take off, with banks able to disburse a little over 7% of the volume distributed under this heading over the last one month. For MSMEs, hard hit by the pandemic lockdown, credit remains a challenge amid the demand slump. Official data shows that as of June 18, state-owned banks sanctioned loans worth Rs 40,416 crore under the scheme, of which Rs 21,028.55 crore has been disbursed, which is a little over 7 per cent of the Rs 3 lakh crore package under this head.

Source:https://indianexpress.com/article/explained/explained-why-the-government-is-likely-to-spend-much-less-this-fiscal-6481331/