Get real on spending

Ensuring a realistic assessment of expenditure is critical in the current environment of uncertainty

The Union finance ministry has launched what is certainly a much-needed initiative as part of its inter-ministerial consultation for preparing the Budget for 2027-28. The finance ministry has asked all Union ministries and departments to present realistic estimates for both their revised numbers for 2026-27 and the Budget numbers they would like to project for 2027-28. The objective of this directive, according to a report in this newspaper, is to obviate the need for frequent mid-year reappropriation of funds on account of either underspending or overspending.

 

 Coming just about a month before the formal pre-Budget consultations begin in mid-October, the Union finance ministry appears keen to avoid a repeat of the underspending that has marked many of the government’s flagship schemes in recent years. Indeed, what happened to the government’s 2025-26 expenditure planning was disturbing in many ways.

 

Of course, the government met its fiscal deficit target of 4.4 per cent of gross domestic product (GDP) in 2025-26, despite a 7.5 per cent drop in net tax collections over the Budget Estimates. But the deficit target was met through a sharp compression in expenditure, with the government's revenue spend shrinking by 2.7 per cent and capital expenditure recording a 4.6 per cent shortfall, compared with the Budget Estimates. What also came to the government’s rescue was a 9.6 per cent rise in non-tax revenue over the Budget Estimates, largely thanks to higher dividends from the Reserve Bank of India and state-owned banks.

 

A closer look at some of the schemes that saw a large part of the money allocated at the start of 2025-26 go unspent will be instructive. Barring a few sectors like defence, railways and roads, the government was unable to spend between 25 and 100 per cent of the money allocated to several schemes in sectors such as health infrastructure, urban and rural housing, irrigation, interlinking of rivers, drinking water mission, rural roads, rural livelihood programmes, nuclear power projects, telecom infrastructure, artificial intelligence mission, semiconductor development project, production-linked incentive schemes, investment and infrastructure fund, research, development and innovation scheme, and emergency credit lines for micro, small and medium enterprises.

 

To be sure, meeting the fiscal deficit target is a desirable goal. However, the underspending of allocated resources for many important schemes is a cause for concern, which if not addressed may well neutralise the larger gains from fiscal consolidation. One, in the event of underspending, it is reasonable to doubt if the schemes, for which the government had earmarked its scarce resources, were designed appropriately. Two, an associated question is whether the government was correctly focused or misguided in allocating money for these schemes. Three, even after assuming that the schemes were designed properly and they needed the allocated resources, it is possible that the absorptive capacity of the ministry or the agency expected to spend that money was poor. The absence of absorptive capacity could also mean that the ministry or the agency had not put in place the foolproof processes for spending those resources without raising the eyebrows of the government’s apex auditing and investigative agencies.

 

Underspending of money allocated for different schemes reveals another disturbing trend: The ability, or even the willingness, of the states to spend the money earmarked for them.

 

At the end of December 2025, for instance, about ₹69,000 crore was lying unused with the states under 53 schemes, each with an annual Budget allocation of more than ₹500 crore. The total outlay for such schemes was over ₹5  trillion. As a result of the underutilisation by the states, the outlay for these schemes under the Revised Estimates for 2025-26 had been slashed by over 25 per cent to ₹3.76 trillion.

 

Even in 2024-25, the problem of underspending by the states was quite stark. For 52 schemes (each of whose annual allocation was over ₹500 crore), the Budget for 2024-25 had provided ₹4.94 trillion, but the Revised Estimates had slashed it by over 22 per cent to ₹3.82 trillion. This was largely because an estimated ₹1.6 trillion was lying unused with the states and Union Territories at the end of December 2024.

 

 The states’ non-utilisation of money allocated for over 50 schemes is a cause for serious concern. The Union government allocates its scarce resources to these schemes believing that they are needed by different sectors of the economy. But going by their non-utilisation by the states, resulting in a slashing of the budgeted allocation in the Revised Estimates for the year, it appears that these resources could have been allocated to benefit other, more needy sectors if a proper assessment of the specific needs of the sectors had been made.

 

This also underlines the criticality of the latest advice to various Union ministries and departments to provide a realistic assessment of how much money they have been able to spend during the year and how much more they would need under their various schemes for the coming year.

 

There is yet another reason for not underestimating the importance of what the finance ministry’s latest exercise is intended to achieve. The forthcoming Budget is being prepared against the backdrop of the continuing West Asian crisis that has impacted India’s oil economy and expenditure plans. The provisional actual estimates of the first four months of the Union government’s revenue and expenditure in 2026-27 underline the need for better expenditure planning and a more thoughtful allocation of resources.

 

The Union government’s total expenditure in the first four months of 2026-27 has grown by about 13 per cent to ₹17.62 trillion over the same period of 2025-26. The budgeted rise in total expenditure for the full year was projected at 8 to 9 per cent. Clearly, expenditure has to be managed more prudently in the remaining months of the year.

 

This slippage is not just because the government boosted its capital expenditure by 30 per cent to ₹4.5 trillion during this period. Remember that the government’s capex is only about 23 per cent of its total expenditure and such spending exceeding the budgeted level should not be a cause for concern.

 

The more worrying reason for the slippage in expenditure is not even the revenue expenditure, which grew by just 8 per cent during April-July 2026-27 to ₹13.11 trillion. The real culprit has to be seen in the government’s subsidies on fertiliser, food and petroleum (a subset of revenue expenditure), which at ₹4.1 trillion, according to the Budget Estimates for 2026-27, were expected to be lower than the amount spent in 2025-26. Instead of declining, major subsidies in the first four months of the current financial year have shot up by 35 per cent to ₹1.53 trillion. These major subsidies account for about 10 per cent of total revenue expenditure. Without the massive slippage in subsidies, the growth in revenue expenditure would have been more muted.

 

The saving grace, however, is the government’s net tax revenue, which against a budgeted target of 9 per cent for the full year has clocked a growth rate of over 27 per cent to ₹8.4 trillion. Non-tax revenues, too, have helped with a growth of about 5 per cent to ₹4.2 trillion, although the Budget had projected no growth at all. Thus, the fiscal deficit target may still be met by the time the current year ends, if the healthy revenue buoyancy is maintained for the remaining months of the year.

 

But that does not mean that the Union finance ministry can be relaxed about how different ministries and the states are planning to spend the money allocated for various schemes in the current year. Indeed, the finance ministry should initiate a similar consultation process with the states to understand from them their actual financial needs for the various schemes that are being implemented by them. Ensuring judicious allocation of money to schemes is as important as securing higher revenues for the exchequer and thereby meeting the fiscal deficit target.