Government puts spending restrictions on ministries to contain fiscal slippage

New Delhi: The finance ministry has directed central government departments and ministries to limit expenditure in March to 10% of their budget allocations for FY20 instead of 15% as was the practice earlier, in an effort to contain fiscal slippage.

The directive could constrain expenditure plans of laggard ministries with huge resource allocations such as agriculture (61%), housing and urban affairs (66%), human resource development, Jal Shakti (63%), railways (63%), and women and child development (63%), which have spent less than 75% of their allocations in the April-December period.

The “rush of expenditure, particularly in the closing months of financial year, shall be regarded as breach of financial propriety and shall be avoided”, the department of expenditure in the finance ministry told departments, citing the General Financial Rules, 2017, in a letter dated 11 February, a copy of which has been reviewed by Mint.

The budget division of the department of economic affairs, in another letter dated 27 December, also reviewed by Mint, directed departments to limit their expenditures to 25% of budget estimate (BE) in the January-March period against the normal practice of spending 33% in the last quarter of the fiscal year.

(Graphic: Paras Jain/Mint)
(Graphic: Paras Jain/Mint)

The finance ministry has also advised that in case of reduction in expenditure ceiling in the revised estimate (RE) against BE, the expenditure should be restricted to the ceiling indicated in RE. In the budget for FY21 presented on 1 February, finance minister Nirmala Sitharaman slashed the expenditure allocation for FY20 by around 88,000 crore to 27 trillion.

Ministries and departments have spent 21.1 trillion in the nine months ended 31 December, leaving 5.9 trillion (22% of RE) available for spending during the three months to March, according to the website of the Controller General of Accounts.

In view of sticky expenditures and slack tax collections, the finance minister invoked the “escape clause” in the Fiscal Responsibility and Budget Management Act (FRBMA), taking the fiscal deficit for this year to 3.8% of gross domestic product (GDP) from the 3.3% budgeted earlier. For the year starting 1 April, Sitharaman has budgeted fiscal deficit at 3.5% of GDP.

The government seems to be keen to ensure that the fiscal deficit target is not breached for FY20, said Madan Sabnavis, chief economist at CARE Ratings Ltd. “With GDP growth being slower than what was budgeted, the cut was expected. This will defer the growth process as any cut in capex will have linkages with other sectors. The impact will not be sharp as from April the new budget will kick in. There could also be rollovers in case of subsidy as part of expenditure cuts on revenue account,” added Sabnavis.

While the government had projected 12% nominal GDP growth in FY20, it came to 7.5%, according to the first advance estimate. The second advance estimate of GDP for FY20 is scheduled to be released on Friday.

The finance ministry has asked departments to obtain approval from it by 9 March and regular sanctions and bills be prepared by 15 March.

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