Growth depends on government spending from here on

An analysis of why the government isn't ramping up spending despite record tax collections

 

 Growth depends on government spending from here on

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• The story: Data show that Indian government's expenditure contracted in the first four months of fiscal year 2021-22 (FY22), despite a surge in tax collections. That is bad news, and may reduce the economic growth, since private investments are not picking up.
• Data and numers: Revenue from taxes has grown 160.9 per cent in the first four months of FY22; but spending has shrunk 5 per cent, compared to the corresponding period last year (2020-21, FY21).

1. Tax collections at Rs 5.3 trillion in April-July were 56 per cent higher than the 2019-20 (FY20) levels; total expenditure was 6 per cent higher than pre-Covid levels.
2. Tax collections pushed up the total revenue of the government to Rs 6.8 trillion during the first four months of FY22 - higher by 193.4 per cent over the corresponding period in FY21. In fact, collections were also 70.9 per cent more than April-July of FY20.
3. In the first four months, revenue expenditure at Rs 8.7 trillion was 4 per cent lower than FY20. Revenue expenditure shrunk 7 per cent in the first four months of FY22, compared to last year.

• The revenue expenditure front: Revenue expenditure comprises fixed obligations or ongoing operating expenses, such as salaries and pensions, but it helps create demand. It is the interest payments under revenue expenditure that are growing, posting 14 per cent growth over last year. Excluding interest payments, revenue expenditure was, in fact, 13 per cent lower than last year and 1 per cent lower than FY20.

1. A part of the revenue expenditure is interest obligation and subsidy. Reining them in is often regarded as prudent fiscal management.
2. Revenue expenditure, excluding subsidies, shrunk 9 per cent in the first four months of FY22, compared to April-July of last year. Non-interest, non-subsidy revenue expenditure contracted 17 per cent over this period.

• The capital expenditure front: Capital expenditure (capex) by the government was, luckily, 15 per cent higher in April-July, compared to last year and 19 per cent higher than FY20. But the government's capex declined 39.4 per cent to Rs 16,912 crore in July, compared to the same month the previous fiscal year. It was down 62 per cent, compared to July FY20.

1. The Union Budget for FY22 provided a capital outlay of Rs 5.54 trillion - a sharp increase of 34.5 per cent over the Budget Estimates for FY21. That had surprised experts like Pronab Sen, who didn't expect it.
2. Tax collections are big, compared to 2019 levels, whereas there is only a small increase in government spending. This, despite the pandemic shocks.
3. The big-spend announcements are not showing up. The recovery seen is not because of the government but because of the private sector. It is the resilience of the Indian economy that seems to have helped it tide over the pandemic.

• GDP growth: India’s gross domestic product (GDP) grew 20.1 per cent on-year in the April-June quarter of FY22, but was 9.2 per cent lower than the levels attained in the first quarter (Q1) of FY20. The increase in tax collection is worrisome because the non-formal sector has lost significant market share to the formal.

1. While it is good news for GDP in the short run, it is bad news for employment in the long run.
2. The responsibility rests firmly with the government. If the Centre doesn’t step up its spending programme, private drive could taper off.
3. Faster spending will help to deepen the recovery underway, as displayed by various high-frequency indicators, and instil greater confidence.

• Demand situation: Experts reckong that due to weak demand conditions, investors are still not ready to invest, and private expenditure is growing slowly due to job losses and salary cuts. Even with a low deficit in FY22, the government borrowing hasn’t declined. It maintains surplus cash, leading to the government securities rate remaining elevated.

1. Gross fixed capital formation in Q1FY22 was 17 per cent lower, compared to the levels in the corresponding quarter of FY20.
2. Private final consumption expenditure, which denotes demand, grew 19.3 per cent in Q1 on-year, but is nearly 12 per cent lower than the levels in Q1FY20.
3. Also, there was also less relief expenditure this year, unlike last year when the Mahatma Gandhi National Rural Employment Guarantee Act was decidedly high.
4. In FY22, several schemes were low key due to the second wave in April and May due to which the revenue budget schemes by ministries suffered.

• EXAM QUESTIONS: (1) Explain what is going wrong with the employment scene in India. (2) The revenue expenditure and capital expenditure of goverment show some interesting trends now, as does the tax collection front. Comment. (3) Experts say that "Faster spending will help to deepen the recovery underway, as displayed by various high-frequency indicators, and instil greater confidence." Comment analytically.

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