government-likely-to-face-financial-crunch-this-fiscal

Context: The government has extended its expenditure rationalisation for the second quarter of this financial year, giving rise to concerns that it may end up spending much lower than the budgeted levels resulting in a long drawn economic recovery.

More on news:

  • Lower revenue stream and the rising debt levels of central and state governments on account of enhanced borrowing to deal with the COVID-19 pandemic-related expenditure have also led to concerns of the debt-GDP ratio breaching the notional red line of 80 per cent from the levels of 70 per cent seen last fiscal. 
  • The concerns are, however, being questioned by some economists who emphasise on the need to concentrate on economic revival and growth rather than being solely focussed on the debt numbers, with the economic costs of reining in debt being seen high in terms of unemployment and loss of lives and livelihood.

Why this expenditure rationalisation?

  • The Finance Ministry last week released guidelines for expenditure control in the July-September quarter, extending an earlier order dated April 8 for a cash management system. 
  • The April order had categorised government departments and ministries into three, outlining their spending quota for the April-June quarter. 
    • Category A has ministries and departments such as the Ministry of Civil Aviation, Department of Health and Family Welfare etc. which has no restrictions. 
    • Ministries and departments in Category B such as those related to fertilisers, taxes, home affairs etc. are required to restrict expenditure within 20 percent of the Budget estimate of 2020-21, 
    • While those in Category C such as petrochemicals, coal, commerce, telecommunications etc. can spend only 15 percent of the budget estimate.
  • Direct taxes have declined by over 25 per cent in the first quarter, while GST collections have been only 45 per cent of the monthly target. Economists point to several key elements of the stimulus package such as the distribution of funds to Micro, Small and Medium Enterprises under the 100% Emergency Credit Line Guarantee Scheme struggling to take off, thereby worsening the impact of the government expenditure compression that is currently underway.

What are the problems with limiting cash outgo?

  • The government’s fiscal stimulus in the wake of the COVID-19 pandemic has been restrained with limited cash outgo. 
  • Schemes that were part of the stimulus package such as the distribution of funds to MSME under the 100% Emergency Credit Line Guarantee Scheme are struggling to take off.
    • With banks managing to disburse a little over 7 percent of the amount earmarked under this head over the last one month. 
  • Several rating agencies and economists have projected the debt-GDP ratio rising to 84-85 percent of the GDP. , with limited cash it is difficult to bring it down in future.

What are rating agencies likely to look out for?

  • The tight control over fiscal policy is being seen driven by the concerns of the debt levels, possibility of exceeding fiscal deficit targets by a huge margin and the consequent actions by rating agencies.
  • More than the deficit, though, rating agencies are watching the deterioration of India’s fiscal metrics in ‘the context of a prolonged or deep slowdown in growth’, which “would invite a ratings downgrade”, as ratings agency Moody’s warned in their note on India’s outlook.

The effort to revive growth, thereby, is a more crucial metric given that practically all countries are bracing for a worsening of their respective deficit positions.

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

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