Front-loading of govt expenditure goes for a toss as economy recovers

This year, despite revenue collection in the first half hitting a record, both revenue as well as capital spending are lower than the 50% mark halfway through the year

Let's assume Ms P, is a salaried person who has been stretching her bill payments towards the fag end of the month. Irked with this habit, she decides to become more prudent and pay her bills in the first half of the month. Happy with the better clarity that she has on her cash balances now, there comes a month when she gets a good raise and earns more than ever. In this situation, what is the chance that she would go back to the old habit, and delay her bill payments?

No way, one would say. But the Government of India, finding itself in a similar situation this time, has cut back on its own record of spending better in the first half of the financial year, despite earning best-ever revenues in April-September 2021, or H1 FY22.

Front-loading, after becoming the norm, has again taken a backseat. Let us see how.

In the first half of this year, or H1FY22, the central government has already earned 55.6 per cent of its total receipts, according to the provisional monthly financial accounts. They include Centre’s share in tax revenue, its non-tax revenue such as public sector bank dividends, and inflow from disinvestments.

This is the best revenue mobilisation in the first half of any year in the last decade, and probably the best ever in many decades. In the recent past, it was only in 2010-11, that the Centre attained this level of revenue mobilisation, and that too was solely due to the biggest telecom spectrum auction India carried out to date.  

Despite this bounty, the Centre has spent only 47.7 per cent of its budgeted revenue expenditure in the first half of FY22, the lowest proportion spent in the last decade.

This includes establishment spending, interest expenses, and all the welfare spending on subsidies, public health, education, farmers, and rural development.

The Centre was more vocal about front-loading capital expenditure, or capex. It has fallen back on this promise as well. Proportion of capex released in the first half of FY22, at 41.4 per cent, is among the lowest in the last decade.

The years 2016, 2018, 2019 saw more than 54 per cent of capex being spent in the first half of the corresponding financial years.

Much close to the infamous demonetisation decision, Prime Minister Narendra Modi had hinted that his government will take a seemingly small decision: to advance the presentation of the annual Union Budget by a month, from February 28 to February 1, from 2017. This, the government had said, will allow the government to start spending from day one of the new financial year, without constraints.

Data shows that it did make a difference. Majority of central government spending, which was largely accumulated in the latter half of the financial year, shifted to the first half. Most years after 2017 show this trend.

Now, there could be multiple reasons that the government chose to, or was compelled to, spend tightly in H1 FY22.

Firstly, the second and the more lethal wave of Covid-19 hit the country in April, May and June of 2021, coinciding with the first quarter (Q1) of this financial year, FY22. Spending began with a lean pace.

But revenues were strong from Q1 itself. It is thus likely that the government’s capacity to spend was hampered due to the restrictions due to the second wave. But it is interesting to note that its ability to collect revenue topped in the same period.

Further, the pace of spending was marginally lower in Q2, when the second wave had subsided. The charts show the drop in pace of revenue as well as capital expenditure, from Q1 to Q2. If the second wave was a reason for the slow speed of spending, it should have ideally come back to normal in Q2, which did not happen.

Another reason could be getting itself relieved from the load of high debt, precipitated by extravagant borrowings. FY21 compelled the government to borrow Rs 13 trillion to finance its fiscal deficit: more than a third of its spending was from borrowed money. Fiscal deficit zoomed to 9.5 per cent of gross domestic product.

This year, it is budgeted at 6.8 per cent of GDP, and heavy borrowing in two successive years is set to take the Centre's debt to a level of 61.7 per cent of GDP, highest in 16 years, according to the government’s own assessment.

With high debt, come higher interest payments. Within just two years, the annual interest outgo is set to grow 32 per cent, from Rs 6.12 trillion in FY20, to the expected amount of Rs 8.09 trillion this year. To put this figure in perspective, this is an astronomical 52 per cent of Centre’s net revenue from taxes.

It is likely that the government wants to shed some interest load on its coffers. This explains the substantially low level of borrowing this year, compared to the last decade (the chart includes all sources of domestic financing).

For most years since it came to power, the NDA government borrowed heavily in the first half of the year to assist the front-loading of expenditure. It did better on borrowing than the Congress, as the chart shows. This time, it has kept the deficit level after H1 at the lowest in the last decade, close to 35 per cent of annual target.

Finally, it could be smart accounting at play here. Last financial year, the provisional actuals (PA) of revenue were better than the revised estimates (RE). The Centre earned Rs 80,000 crore more as net tax revenue in actuals, as compared to the RE. Total receipts exceeded RE by about Rs 90,000 crore. In other words, the final or actual data bettered the government's estimate. 

Similarly, it is possible that the central government has set not ambitious, but easily achievable targets on revenue and modest expenditure expectations this year. It is already performing better on revenue. 

Will it go overboard on spending in the latter half of FY22 or not, remains to be seen.