Unspent govt funds may lower borrowing needs

Unspent govt funds may lower borrowing needs

New Delhi: The government’s inability to spend all its allocated funds, often criticized for hobbling development projects, could help limit state borrowings this fiscal and reduce upward pressure?on?interest rates.

The Rs70,000 crore it raised from the auction of radio waves for so-called third-generation (3G) mobile phone services would also help check borrowings.

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The Union government’s budgeted expenditure in the year to 31 March is a record Rs11.08 trillion, higher by 56% from three years ago. Analysts have been concerned about additional upward pressure on interest rates if there are unforeseen expenses during a year in which borrowing rates are expected to increase as the central bank battles inflation.

But recent history shows the government would be unable to spend the allocations, two finance ministry officials said on condition of anonymity.

Planned expenditure has more than doubled in the past four years to Rs3.73 trillion in 2010-11. The Centre and the states are not equipped to deal with the pace of increased allocation, one of the officials said.

“By and large, the ability of the system to absorb is growing at a fairly steady pace," chief statistician of India Pronab Sen said.

Spending allocations, on the other hand, have grown faster than the government’s ability to absorb them, the finance ministry officials said.

Data for 2009-10 put out on Monday by the controller general of accounts showed how a slow government machinery offsets the impact of unexpected increases in some expenses.

Revenue receipts fell short of estimates made in the Budget in February, and there were unexpected increases in non-Plan expenditure. For instance, defence ministry pensions were around Rs9,000 crore more than expected when the budget was finalized.

Despite the unexpected increase in non-Plan expenditure and a shortfall in revenue, the impact on the absolute size of fiscal deficit was more than offset by under-spending of almost Rs13,000 crore in planned expenditure, particularly the rural employment guarantee programme.

Eventually, the fiscal deficit was Rs4.12 trillion, around Rs2,000 crore less than the number forecast in the Budget.

In the preceding two years, too, the government was unable to spend its allocations on Plan expenditure.

In the current fiscal, the rural job guarantee programme has been allocated Rs40,100 crore, about Rs7,000 crore more than what was spent last year. Last year was a time of faltering farm growth in the wake of a drought.

Both the finance ministry officials felt even in a best case scenario, the rural employment guarantee programme could not absorb more than Rs35,000 crore this fiscal—providing the government a cushion in the event of unforeseen expenses elsewhere.

As employment guarantee is a demand-based project, the Centre transfers money only when the states ask for it, one of the officials pointed out.

Recent spending patterns show states’ estimates of expenditure can be based on loose assumptions.

“Most of the plans that are made are repetitions of earlier demands," said D.K. Srivastava, director of Madras School of Economics and a member of the 12th Finance Commission. “Most states and Central ministries’ plans are ad hoc in nature."

When creaky government machinery is juxtaposed with the bonanza from the recent auction of high-speed 3G radio spectrum, the fiscal deficit target of Rs3.81 trillion, or 5.5% of gross domestic product in 2010-11, looks well within reach, one of the finance ministry officials said.