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MOSL: ECOSCOPE-Where will the government cut its spending? Adverse economic impact would depend on states and CPSEs

ECOSCOPE: Where will the government cut its spending? Adverse economic impact would depend on states and CPSEs

 

• Actual spending of the central government in FY19 was INR1.3t lower than the budget estimates (BEs or targets). Almost the entire reduction in spending last year was spread equally in only two accounts - food subsidy and transfer to states. Therefore, it becomes pertinent to include state governments and central public sector enterprises (CPSEs) into any analysis concerned with fiscal policy.
• Following a receipt shortfall of INR1.5t last year, the central government is likely to witness a shortfall of ~INR2.1t (or USD30b) in FY20. The shortfall for state governments could be even higher at ~INR3.5t (or USD50b), as against INR3t in FY19. As against total receipt shortfall of 9.5% (INR4.5t or USD65b) last year, the shortfall could be ~11% (INR5.5t or USD80b) this year. Historical data suggests that similar large shortfalls were seen in FY14 and FY15 also. Notably, the actual fiscal deficit of the government in all three years - FY14, FY15 and FY19 - was close to the targets. Not only the center, but also the states (on aggregate basis) met their deficit targets by cutting spending proportionately.
• What happens if spending is cut proportionately to the receipt shortfall this year too? One, fiscal deficit of the central government will still be higher - from budgeted 3.3% to 3.5% of GDP for FY20 because of nominal GDP growth of ~7%, compared to budgeted growth of 11%. Two, spending growth of the general government (center + states) will still be at 3-year high of ~12% YoY this year and at an impressive 9-year high growth of 11.3% for the center. Three, notwithstanding the higher deficit, it would still not qualify as a stimulus due to lower-than-budgeted spending.