New Delhi: Worried by a sharp increase in expenditure even as revenue receipts fail to keep pace, the finance ministry on Wednesday announced a new round of austerity measures and signalled afresh its intent to hold subsidy payouts within projected levels.
The government is confident that with these measures it will be able to contain the fiscal deficit, or gross borrowings, at the projected level of 4.8% of gross domestic product (GDP) in 2013-14.
Every department has been asked to cut non-Plan expenditure—which includes the subsidy payout—by 10% in the current fiscal. “No re-appropriation of funds to augment the non-Plan head of expenditure on which cuts have been imposed, shall be allowed during the current fiscal year,” the finance ministry said in a notification. The ministry also slapped curbs on government departments holding seminars and conferences, mainly in five-star hotels and abroad, except for the purpose of promoting trade.
“In the context of the current fiscal situation, there is a need to continue to rationalize expenditure and optimize available resources,” the notification said.
India’s fiscal deficit in the first four months (April-July) of the year had crossed 62% of the annual projection, compared with 51.5% a year ago. The government has also exhausted 73% of its revenue deficit target in the four months, compared with 61.3% in the same period a year ago.
Faced with a similar situation in 2012-13, finance minister P. Chidambaram undertook a massive compression of Plan expenditure to contain the fiscal deficit at 4.9% of GDP.
Experts were not entirely convinced about the efficacy of the latest round of initiatives. The government should try to boost revenue while cutting spending, they said.
“Some pruning in the Plan expenditure may have to be undertaken like last year,” said N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy. “However, government should abide not just by the fiscal deficit target but also by the revenue deficit target.”
Under the new expenditure compression rules, while vehicle purchases were banned until further orders, there will be a total ban on creation of new central government posts.
“Posts that have remained vacant for more than a year are not to be revived except under very rare and unavoidable circumstances and after seeking clearance from the Department of Expenditure,” the notification said.
Though the finance ministry ordered all officials to travel in economy class, it exempted “officers in the apex scale” from any such restrictions.
“In all cases of air travel, only the lowest fare air tickets of the entitled class are to be purchased/procured. No companion free ticket on domestic/international travel is to be availed of,” it said.
The size of Indian delegations travelling overseas and their stay abroad will also be kept to the “absolute minimum”.
The existing restrictions that not more than one-third of the total budget of a department can be spent in the last quarter (January to March) and that not more than 15% can be spent in the last month of the financial year will remain in force.
India’s economic risks have risen because of slowing growth, rising inflation, high fiscal and current account deficits, and the rupee’s steep depreciation this year. The Indian economy grew at its slowest pace in four years at 4.4% in the June quarter, compared with 4.8% in the three months ended March, belying hopes that the economy has bottomed out.
Moody’s Investors Service Inc. has put India on notice, warning that the country’s sovereign rating outlook will depend on the depth and extent of the current economic downturn and the trends in the balance of payments situation. Moody’s and Fitch Ratings still have a stable outlook on India at their lowest investment grade rating.
The Prime Minister’s Economic Advisory Council, in its economic outlook last week, cautioned that though the finance minister had promised not to cross the “red line” on the fiscal deficit, containing the deficit at 4.8% of GDP in 2013-14 could be a “challenge”. The council’s chairman, C. Rangarajan , said the government would have to reduce non-food subsidies, especially after the implementation of the food security Bill.
Before taking charge as the 23rd governor of the Reserve Bank of India, in his last signed column, Raghuram Rajan wrote that care should be taken that essential components of expenditure are not curtailed while compressing public expenditure.
“Excessive public expenditure may lead to crowding out effect; but not getting the right size and the right composition of government expenditure may also negatively affect the objectives of inclusive and sustainable growth,” he warned.