Finance ministry defends spending cut in Sep quarter citing falling revenues

The Union finance ministry on Thursday said its decision to cut spending by 22.2% for the September quarter was aimed at consolidating the government’s fiscal position amid falling revenues.

Reduced government spending, especially capital expenditure, may have impacted India’s economic recovery, Mint reported on Monday.

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Gross domestic product (GDP ) contracted 7.5% in the September quarter, recovering from a historic low of -23.9% in the three months ended June, primarily on the resilience of the industrial sector.

“Government spending contracted by 22.2% in Q2 compared to 16.4% in Q1, reflecting the effort to consolidate the fiscal situation given the fall in revenue. The enhanced government spending in Q1 was imperative at that time, given the uncertainty of the lockdown and has supported the recovery in various segments in Q2,” the ministry said in its latest Monthly Economic Review.

It said FY21 has so far entailed fiscal challenges, such as additional expenditure requirements to revive the economy and to provide relief to those affected by the covid outbreak, as well as a shortfall in revenue collection because of the disruptions in economic activity. “The Centre’s fiscal deficit stood at ₹9.53 trillion during April-October, which is 119.7% of the budget estimate (BE) compared to 102.4% during the same period in FY20. On the revenue side, the gross tax revenue registered negative growth of 16.8%, because of the negative growth in all direct taxes and major indirect taxes, except for excise duties,” it said.

The Centre’s overall expenditure for the first seven months of FY21 registered 0.4% growth and was at 54.6% of the BE vis-à-vis 59.4% of BE in the year ago. The revenue expenditure witnessed 0.7% growth, while capital expenditure fell by 1.9% in the April-October period compared to the year ago.

Moving deeper into Q3, there was “cautious optimism” that the global economic uncertainty may not mirror in India, notwithstanding moderation of a few high frequency indicators late in November, the finance ministry said. “Overall increase in rabi coverage with adequately filled irrigation reservoirs bodes well for growth of agricultural output in 2020-21. The sustained demand for labour arising from the increase in rabi sowing has also contributed to growth in rural wages, additionally propped up by an increase in wages and employment generation under MGNREGS,” the ministry said.

However, the ministry also cautioned that a second wave of covid-19 could pose a downside risk. “There is growing cautious optimism that the steep plunges of the April-June quarter may not resurface with significant progress in vaccines and contact-intensive sectors increasingly adapting to a virtual normal. The need of the hour is to follow covid-appropriate behaviour and earnestly adhere to laid down standard operating guidelines till a vaccine is approved and a large section is inoculated,” the ministry said