Budget 2020-21 Is Falling Apart- Can April 8 Order Bring Some Savings?

COVID-19 Unravelling Union Budget 2020-21

PART I- What will April 8 Order Restricting Expenditures Lead To?

Budget 2020-21 Is Falling Apart

Budget 2020-21 of the central government has started falling apart even when the financial year has just begun.

COVID-19 has struck a massive blow to people, economy and budget. Both sides of budget- revenues and expenditures- are unravelling.

The central government announced a package of Rs. 1.7 lakh crores on 26^th March. This might require about 75000-80000 crores of additional expenditure beyond what was budgeted. Programme for strengthening medical infrastructure has also been announced.

There is growing chorus for more fiscal measures- for supporting businesses especially small informal businesses and millions of workers rendered jobless by the lockdown of economy.

The state governments finances have suffered more and they are also demanding packages of support.

The central government will sooner or later will have to address these demands.

What is the requirement of additional fiscal expenditure in 2020-21?

In this situation, the Government imposed cuts on 81 out of 100 budget demands directing concerned ministries and departments in category B and category C to limit expenditures to 20% and 15% respectively in the first quarter.

Will it work and how much cash savings can it deliver?

Expenditure programmes of the central government, which are still focussed on micro-managed solutions of old economy, reflect the needs and strategies first forty years of India’s independence. Government’s redistribution programmes are also quite convoluted and badly focussed. These programmes do not deliver government support efficiently to destitute, poor and vulnerable.

Is there a way to restructure our expenditures programmes to save costs and also deliver better support to these groups?

Revenues are badly hit. Demand for petroleum products has almost collapsed hurting customs and excise revenues. Over 2/3^rd of goods and services producing businesses are shuttered. Most tax revenues- GST, Excise Duties, Corporation Taxes- are likely to see major hit.

Disinvestment programme is totally grounded. Non-tax revenues will suffer in line with declining or disappearing profits of public sector entities.

What is the extent to which revenues may fall during 2020-21?

Increasing expenditures and declining revenues will push fiscal deficit sharply. There is also hanging question of off-budget financing which distorts government expenditures and raises the cost of its financing.

How much widening of deficit can the government allow?  What is the plan to finance widening deficit? Will the government rely only on credit markets to borrow more? Is resorting to direct monetisation an option?

I explore these issues in this series of blogs. The expenditure issues are analysed and discussed in this Part I of the three blogs.

What Is Central Government Expenditure Outlay For 2020-21?

Central government’s budgeted expenditure for 2020-21 is Rs. 30.42 lakh crores or a little over $400 billion at Rs. 75 to a dollar. This scale of budget expenditure is about 15% of India’s pre-COVID-19 estimated GDP for 2020-21 of Rs. 210 lakh crores.

Rs. 3.11 lakh crores of public expenditure in 2020-21 is off-budget. This includes 73,147 crores of net funding from NSSF, Rs. 49,500 of funding by way of Fully Serviced Bonds (FSBs), Rs. 10,000 crores recapitalisation bonds of IIFCL and Rs. 1,78,121 crores of borrowings by organisations like Air India Asset Holdings, Railways and NHAI which do not have debt servicing capability from their own revenues.

This makes central government’s public expenditure for 2020-21 to be of the order of Rs. 33.53 lakh crores or a little less than $450 billion or about 16.5% of GDP.

How Is Government Expenditure Budget Presented?

The Constitution requires the government to present its demands for grants to the Lok Sabha for authorising expenditures from the Consolidated Fund of India (CFI). The central government presented proposals under 101 demands as part of budget 2020-21.

The government broadly classifies its expenditure under five categories. These are establishment expenditure, central sector schemes, centrally sponsored schemes, other central expenditures and other transfers. It is difficult for any common man to make out the difference between central sector schemes and other central expenditure. It is also equally difficult to make out what is the difference between transfers for centrally sponsored schemes and other transfers.

This expenditure is further divided in hundreds of major heads, minor heads, sub heads etc. It makes life still more difficult. There is a further categorisation into four broad classes of government services delivered through these expenditures- general services, social services, economic services and grants in aid and contributions. There is further division in revenue and capital expenditure. There is also a classification in development expenditure and non-development expenditure. Earlier, the government classified the expenditures in plan and non-plan as well.

No one really understands budgeting and accounting of government expenditures.

What Is Budget Expenditure for Category A, B and C Ministries?

Ministry of Finance issued instructions on 8^th April, citing stressed cash position in Quarter I, to regulate the government expenditure. The ministries and departments of the central government have been placed in three categories.

The government did not specify the rational of this three-way classification. Neither did the government spell out budget outlays falling under these respective categories? There was no quantification of expected savings as well.

Category A includes 17 demands.

The ministries and departments controlling these demands have been exempted from any cut. This category includes apex institutions of state like the President and the Supreme Court, primary rural focused departments of Rural Development, Agriculture and Food and Public Distribution, departments engaged in delivering health services in this crisis like the department of Health, Ayush and Health Research, mandatory expenditures like interest payments and some economic ministries like Ministry of Textile, Ministry of Civil Aviation and Department of Pharmaceuticals.

A summing up of the expenditures under these 17 demands from the budget papers indicate that an expenditure of Rs.14.38 lakh crores or 46.62% falls in Category A.   

Category B includes 31 demands.

This category has been subjected to limiting Q1 expenditure to 20% with further condition that expenditure will not exceed 8% in any one single month. This category includes most of the departments which discharge sovereign functions, including delivering public goods functions. Demands controlled by the Ministry of Home Affairs, Police, Defence, Cabinet, Union Territories fall in this category. There are three important economic and infrastructure ministries and departments in this category as well. These are Ministry of Road Transport and Highways, Ministry of Petroleum and Natural Gas and Department of Fertilisers.

Budgeted expenditure for 2020-21 falling in this category amounts to Rs. 11.45 lakh crores or 37.14% of BE.

Category C has maximum number of 52 demands.

This category includes most of the economic, infrastructure and social development ministries and departments. These have been subjected to a total expenditure of 15% of the annual budget with expenditure in any single month not exceeding 5%. The ministries and departments directly concerning labour and small businesses like the Ministry of Labour and Employment and the Ministry of Skill Development and Entrepreneurship and Ministry of Micro, Small and Medium Enterprises are part of this group. 

Relatively smaller budget outlays fall in this category. Budgeted expenditure for 2020-21 falling in this category amounts to only Rs. 5.01 lakh crores or 16.24% of BE.

In addition, large expenditures require prior clearance of the Ministry of Finance.

No item of expenditure to be cut has been specified in the order. It has been left to the ministries and departments concerned.

What expenditures of central government are amenable to cuts?

a. Mandatory expenditures:

More than half of India’s budgeted expenditure is of mandatory nature. The central government has virtually no discretion or control over such expenditure. This expenditure cannot even be postponed.

This includes four broad types of expenditure- a. salaries and pensions or the establishment expenditure (Rs. 6.10 lakh crores), b. interest payments on debt and other fiscal liabilities of the government (Rs. 7.08 lakh crores), c. Finance Commission mandated grant transfers to states, including disaster relief grants and local bodies grants (Rs. 1.50 lakh crores) and d. GST Compensation (Rs. 1.35 lakh crores).

These four types of mandatory type of expenditures add up to Rs. 16.03 lakh crores (52.69%).

b. Discretionary expenditures:

Rest of the budgeted expenditure, in theory at least, is discretionary and therefore amenable to cuts.

This amounts to Rs. 14.39 lakh crores (47.31%) or about $190 billion.

This discretionary expenditure is meant to pay for four types schematic expenditures.

First, all the schemes run by and services provided by the central government ministries and departments or outlays under the - ‘Central Sector Schemes’. This amounts to Rs. 8.31 lakh crores and includes most of the capital expenditure, subsidies and schemes implemented by the central government ministries and departments.

Second, the central government provides grants to the state governments implementing schemes in subjects reserved constitutionally for the state governments. The outlay for these schemes known as Centrally Sponsored Schemes or CSSs is Rs. 3.40 lakh crores.

Third, the central government incurs expenditures though its agencies like Universities Grants Commission and Navodaya Vidyalayas under the Ministry of Human Resources Development, provides investment and other assistance to public sector undertakings like equity and other support to BSNL and MTNL etc. While the budget papers place allocation of Rs. 8.88 lakh crores under the broad head of ‘other central expenditure’, excluding interest payments, the discretionary outlay is Rs. 1.80 lakh crores only.

Fourth, there is a category ‘other transfers’, which basically accounts for transfer of loans and discretionary grants to state governments. This class of expenditure has discretionary outlay of Rs. .88 lakh crores, after excluding the GST compensation payments of Rs.1.35 lakh Crores.

c. How much of discretionary expenditure is in Category B and C?

Total budgeted discretionary expenditure is Rs. 14.39 lakh crore. I have done aggregation of budgetary provisions of demands under all the three categories of ministries and departments as made in the April 8 order. It reveals that discretionary expenditure under category A is Rs. 5.19 lakh crore, under category B Rs. 4.69 lakh crore and under category C Rs.4.50 lakh crore.

As only Categories B and C are subjected to cuts, the ministries and departments controlling 83 of 100 demands will actually have only Rs. 9.19 lakh crore of discretionary budgets to achieve their targeted cuts. This zone of choice available is less than 30% of the 2020-21 budgeted expenditure. 

Is April 8 Order Likely to Achieve Anything Worthwhile?

The central government started presenting budget on 1^st February from the year 2017. This enabled the entire budget to become available for the very productive working session of April-June. Since 2017-18, first quarters have witnessed heavy expenditures.

For the financial year 2017-18, first quarter expenditure exceeded 30% of annual budget. In 2018-19, similar high expenditure trend was in evidence. All the three types of expenditures- revenue, capital and total expenditure clocked 29% run rate. 

2019-20 was a non-trend year as general elections were held in April-May. Still it clocked 26% of annual expenditure in the first quarter.

The government wants to restrict expenditure of category B ministries and departments to 20% and of category C ministries to 15% in this busy working season. Lockdown, of course, has turned the busy working season to a non-working season for at least April. Rest of the months can take up slack, if permitted.  

If all the three categories of ministries and departments were to incur 30% of the budgeted expenditure in the first quarter as per the trend, the total expenditure in the first quarter would be Rs. 9.25 lakh crore.

My calculations, which I explain later, suggest that if the Category A ministries and departments were to incur 30% expenditure as per the trend as these are exempt and category B and C were to limit it to 20% and 15%, the total expenditure in the first quarter would be Rs. 7.35 lakh crore.

This should lead to potential savings of Rs. 1.90 lakh crore.  

In this hour of the need to expand fiscal expenditures to provide much needed support to the shuttered businesses, over 10 crore workers rendered unemployed, the government should not ideally aim at any expenditure reduction.

Disregarding this imperative, let me explore whether the government will be able to achieve it by imposing the restrictions on ministries and departments implementing 81% of demands?

Category A Ministries and Departments

Total expenditure budgeted for 2020-21 for Category A demands for grants is Rs. 14.38 lakh crore, including discretionary expenditure of Rs. 5.19 lakh crore. This expenditure is exempt from any cut. Thus, 36.12% of total budget expenditure is not required to yield any savings.

Category B Ministries and Departments

Category B demands have total budget of Rs. 7.64 lakh crore (24.77%), including discretionary expenditure of Rs. 4.69 lakh crore.

These Category B ministries and departments have almost no centrally sponsored schemes outlay. There is only one scheme- police modernisation with an outlay of Rs. 3946 crores.

Rs. .84 lakh crore of budget, however, is to be transferred to the states and union territories. This includes Rs. .31 lakh crore to Jammu and Kashmir under demand no. 55, Rs. .14 lakh crore to the states against receipts of externally aided projects, Rs. .22 lakh crore from National Disaster Relief Fund (NDRF) and Rs. .15 lakh crore for discretionary central assistance to States under demand no.38.

The bulk of amount budgeted under NDRF has already been released.

It is impossible to keep Jammu and Kashmir financially afloat without releasing funds from this grant.

Additional central assistance from externally aided agencies is directly linked to release of funds by them for the state government projects. It is unlikely to be stopped.

It is more likely that about 50% of budget of Rs. .84 lakh crore for transfers to the states would be incurred before 30^th June rather than being limited to 20%.

More than 80% of the remaining discretionary expenditure in this category is accounted for by four heads of expenditure. Capital outlay for defence has provision of Rs. 1.14 lakh crore. Roads and Highways outlay is Rs. .92 lakh crore. Fertilisers subsidy outlay is Rs. .71 lakh crore. Subsidy for LPG is Rs. .37 lakh crore. In all, these four items account for Rs. 3.14 lakh crore.

It would be completely inadvisable to delay release of fertiliser subsidy bills which are already in massive arrears. Similarly, more expenditure will be needed for LPG subsidy scheme as the government has announced three free cylinders for 8 crore Ujjavala scheme beneficiaries for the three months of April to June.

Months of April-June are the busy working season for the road construction. The work on highways has been presently suspended on account of lockdown. There is likelihood of large contractual claims for these road works without the work actually being down on account of idling machinery and labour. Road works should be immediately exempted from lockdown and scaled up quickly. It would be unwise to make any cut in this expenditure.

This leaves acquisition of arms and ammunition under the capital head of Ministry of Defence. Their expenditure is more related to manufacture and delivery of equipment. Possibly, any discretionary cut cannot be applied there.

This granular analysis reveals that no savings can be expected to materialise from Category B ministries and departments. 

Category C Ministries and Departments

Category C demands have total budget provision of Rs. 5.01 lakh crore. Out of this, Rs. 4.51 lakh crore (90%) is discretionary expenditure, which theoretically is quite amenable to cuts. This category has been subjected to most severe cuts. Only 15% of expenditure has been permitted in first quarter.

The complexion of expenditure in this category is quite different than category A and B. This group of ministries and departments are what can broadly be described as ‘development’ ministries and departments. There group has fairly good share of allocations for centrally sponsored schemes (CSS) and transfer of funds to the central agencies.

CSS budget alone is Rs. 1.59 lakh crore (35.2%) out of discretionary expenditure of Rs. 4.51 lakh crore. As many as 18 ministries and departments operate one or more CSS in this group. Normally, first instalment, which is usually 50% of the annual allocation, is released in the first three months. Limiting expenditures to 15%, would force ministries and departments to push release of the first instalment to the second quarter.

Total CSS allocation is split almost equally in the Category A and C ministries and departments. Category A ministries and departments are exempt from any cuts. Category C ministries and departments are being subjected to severe most cut.

How would the central government face state governments if the ministries and departments of Category A were to release CSS funds without any cut and the ministries and departments of Category C ministries and departments were to withhold it?

This is quite arbitrary and discriminatory. This would also make several important national programmes suffer at a time when these are most needed. State governments are under more severe financial squeeze. Stopping or reducing transfer of CSS schemes budget would deal a big blow.

Subjecting CSSs in category C to the indiscriminate cut of 15% is quite an inadvisable step to be taken which will also lead to massive protests from the state governments.

There is budget outlay of Rs. 1.34 lakh crore for central government agencies under the head ‘other central expenditures’ for category C ministries and departments. Most of this expenditure provision supports payment of establishment expenditure in agencies of the Government of India. Grants under the Higher Education and School Education departments amounting to about .4 lakh crore is basically to support central universities, central schools, Navodaya Vidyalayas etc. Such grant supports can hardly be cut.

There is budget provision of .38 lakh crore for support to BSNL and MTNL for voluntary retirement of staff, equity support for 4G licence and compensation for GST payable on 4G licence fee. This is good item for cutting expenditure, though it is quite unlikely that it would be done.

There is a bulk provision of Rs. .22 lakh crore under the Department of Economic Affairs for supporting infrastructure pipeline. As no expenditure has been specifically identified and possibly is unlikely to be identified, this provision may ultimately lapse.

Expenditure provision of 1.53 lakh crore under ‘central sector schemes’ is spread across all the 52 ministries and departments. This supports hundreds of small schemes, which in turn supports bulk of establishment expenditure of recipient central agencies. It would be very difficult to make savings out of such expenditures.

This includes a number of central government ministries and departments whose interventions in state affairs is conducted through central sector schemes in place of centrally sponsored schemes. Schemes of Ministry of Power (allocation .13 lakh crore), Ministry of New and Renewable Resources (allocation .05 lakh crore), Ministry of Medium and Small Enterprises (allocation .07 lakh crore), Ministry of Urban Development (allocation of Rs. .2 lakh crore for metro and Delhi region transport projects) and the like are meant to provide grant support to the states. Stopping or reducing disbursements under these schemes at this point of time would be most inadvisable.

There are also allocations for purely central government operating entities like Space Commission and other scientific departments.

Some allocations are meant for specific liabilities like contribution to employees’ pension fund. You cannot make cut in these expenditures. You can delay only.

A few expenditures are undertaken from funds flowing from other funds like Universal Service Obligation Fund meeting the expenditure for roll-out of broad band connectivity to villages. You don’t save any expenditure by cutting such allocations.

A comprehensive scrutiny of discretionary expenditure of ministries and departments lead to the conclusion that there is some scope, albeit very small and which will cause disproportionate pain, for limiting expenditures to the extent of about 25000 crores in this category.

CONCLUSION

About 30% of annual budgeted expenditure is incurred in first quarter, as per trend, after the government started presenting budget on 1^st February in 2017.

Government has imposed a cut on expenditure by limiting expenditure of ministries and departments to 20% of budgeted expenditure for category B and to 15% for category C.

Budgeted expenditure of category A, B and C for 2020-21 is Rs. 14.38 lakh crore, Rs. 11.45 lakh crore and Rs. 5.01 lakh crore.

If the category A ministries and departments incur expenditure @ of 30% as per trend and the rest of the ministries and departments limit it as per April 8 order, the respective expenditure of A, B and C ministries and departments would be Rs. 4.31 lakh crore, Rs. 2.29 lakh crore and Rs. .75 lakh crore, aggregating to Rs. 7.35 lakh crore.

This will, in such a case, result in lesser expenditure of Rs. 1.90 lakh crore. This, however, is unlikely to happen.

Rs. 6.76 lakh crore out of total budgeted expenditure of category B ministries and departments is mandatory type- establishment, finance commission mandated transfers etc. In all its likelihood, this expenditure will take place at the normal pace.

At normal rate of 30%, it amounts to Rs. 2.03 lakh crore. At 25% rate, it is Rs. 1.69 lakh crore. At 20% mandated rate, the expenditure in category B ministries and departments will have to be limited to Rs. 2.29 lakh crore (Rs. 11.45 lakh crore * 20%).

If the mandatory expenditure of category B ministries and departments takes place at normal rate of 30%, this will mean that discretionary expenditure of Rs. 4.69 lakh crore will have to be limited to Rs. .26 lakh crore (Rs. 2.29-2.03 lakh crore). If mandatory expenditure is limited to 25%, it will leave scope of only Rs. .6 lakh crore.

Given the nature of discretionary expenditures described above, it will be impossible to restrict to 20%. There might actually be no savings.

Ministries and departments in category C have smaller mandatory outlays- Rs. 1.04 lakh crore out of total outlay of Rs. 5.01 lakh crore. Restricting expenditures to 15% in this group would require total expenditures to be limited to Rs. .75 lakh crore. Depending upon limiting mandatory expenditures to trend of 30% and linear expenditure of 25%, it would leave discretionary expenditures to be managed within Rs. .45 lakh crore or .56 lakh crore.

It will be impossible and quite inadvisable to limit discretionary expenditure in Category C ministries and departments to this level.  

As many as 18 ministries and departments in category C have CSSs of 1.59 lakh crore of CSS. Normally 40-50% of CSS expenditure takes place in first three months. The demands in this group covers establishment expenditures of the agencies like central universities and non-CSS flagship schemes of ministries like power and renewables. Hardly any savings are desirable or feasible from this group.

April 8 order is more likely to remain on paper.

On the contrary, the government has announced a 1.7 lakh crore relief package already. It is unavoidable that the government would need to come up with another package for addressing at least 10 crore workers of informal sector which has suffered considerable pain, including loss of wages. It also appears necessary that the government will come up a package to assist at least the MSME businesses. 

These additional packages may have to be implemented in the first quarter itself.

For the financial year 2020-21, the government may likely face additional expenditure demand of about 3 lakh crores.

SUBHASH CHANDRA GARG

NEW DELHI 14/04/2020