In this post, Pandey and Raju analyse the trends in the revenue, expenditure, and borrowings of the Government of India in the first quarter of 2020-21, based on data released by the Controller General of Accounts. They argue that the contraction in revenues in the Covid-struck economy has constrained the government’s capacity to effectively address the operational needs arising from the pandemic, and that greater borrowing by the government may be required in the coming months to offset a rise in expenditure.

While government expenditure is bound to increase in the pandemic-struck Indian economy, revenues are expected to take a sharp hit. Despite the gradual reopening of the economy, economic revival is going to be slow and protracted. The clamour for a fresh fiscal package from the government is likely to increase in the coming months. Assessing the fiscal position in the first quarter of 2020-21 will help provide some clarity on the fiscal headroom available with the government during these unprecedented times. In this post, we analyse the trends in the revenue, expenditure, and borrowings of the central government in the first quarter of the current financial year.

What was the extent of increase in the level of borrowing?

The gap between government spending and receipts, that is, the fiscal deficit, is financed by the government through borrowings. In February this year, the budgetary target for borrowing was set at Rs. 7.96 trillion for 2020-21 (Ministry of Finance (MoF), 2020a). Because of the severe fiscal stress arising from Covid-19, the government has subsequently revised this borrowing target upwards to Rs. 12 trillion (MoF, 2020c). While the Controller General of Accounts (CGA) data show that the fiscal deficit for the first quarter has reached 83% of the budget estimate (BE), if we compare the fiscal deficit with the revised borrowings target, it comes to 55%. At the end of June this year, the level of government borrowing stood at Rs. 6.62 trillion. This was a 53% increase over the level in the first quarter of the previous year.

During the first quarter of 2020-21, the government relied on domestic borrowings to finance around 96% of its fiscal deficit. Out of the Rs. 6.3 trillion financed from domestic borrowing, 87% was sourced from market borrowings. A 117% increase was observed in market borrowing compared with the first quarter of the previous year. On the other hand, external borrowings saw a 325% increase over the same period in 2019-20. However, the extent to which external borrowings financed the deficit, was much lower, accounting for only around 4% of the fiscal deficit in the first quarter of 2020-21.

How did the gap between government revenues and spending widen?

Table 1. Trends in revenue and capital receipts

Source: CGA provisional actuals data for June 2020 and June 2019. Receipts statement from Union Budget 2020-21: Budget at a glance.

Budgetary targets set in February this year expected 78% of the total receipts of the government in 2020-21 to come from gross tax revenue (GTR) collections. As per these targets, over 54% of GTR was expected from direct tax collections, which include income tax and corporation tax. However, the pandemic has made it difficult for the government to recover revenues. The first quarter of 2020-21 saw GTR decline by 33% from the same period in the previous year. Compared to the first quarter of 2019-20, income tax collections decreased by 36%, while corporation tax receipts fell by 23% at the end of June this year. On the other hand, receipts from indirect taxes, which were expected to account for around 41% of GTR as per this year’s budget, also plummeted. Compared to the first quarter of 2019-20, collections from indirect taxes, which include GST, union excise duties, customs, and service tax, saw a 34% decline in the first quarter this year.

The budgetary targets anticipated nearly 12% of total receipts of the government in 2020-21 to come from non-tax revenues (NTR). NTR collections stood at Rs. 0.15 trillion at the end of June this year – a shortfall of 55% compared to the first quarter of 2019-20. Moreover, non-debt capital receipts, which include revenues from disinvestment as well as recoveries of loans and advances, did not do much for boosting revenues. Receipts from disinvestment have remained negligible in the first quarter of 2020-21. Some relief came from net recoveries of loans and advances, which saw a 48.5% increase in collections from the same period in the previous year.

In addition to the impact of the pandemic, the weak fiscal situation in 2019-20 will make matters worse. The provisional actuals of 2019-20 observed a 24% decline in total receipts compared to the 2018-19 actuals. Such a contraction in government revenues in 2019-20 would lower the base level, making it more difficult to meet the 2020-21 budget targets. While total receipts at the end of 2019-20 stood at Rs. 17.5 trillion, the BE for total receipts in 2020-21 was pegged at Rs 30.9 trillion. This means that to meet the budgetary target for 2020-21, total receipts would have to grow by around 77% over the level collected in 2019-20. Such an expectation is a tall order for a government grappling with a pandemic. Within the first three months of this year, total receipts have already dropped by around 47% from the first quarter of 2019-20.

In line with its dried-up revenues, government has prioritised its spending amidst the pandemic. All ministries and departments not actively involved in fighting the pandemic were subject to expenditure restrictions (MoF, 2020b). Despite such curbs, spending has remained high, as is expected during a pandemic. The total spending in the first quarter of the current year stood at Rs. 8.15 trillion, which was a 13% increase from the same period in the previous year. At the end of June this year, capital expenditure grew by 40% over the same period last year. In fact, the provisional actuals for 2019-20 showed a 9.4% increase in capital expenditure over the 2018-19 actuals. The rise in capital expenditure observed in the first quarter of the current year is bound to translate to better long-term growth prospects for the economy. Revenue expenditure at the end of June 2020 recorded a 10% increase compared to the first quarter of 2019-20.

Within the first three months of this year, the Department of Rural Development has already used up 73% of its BE released this February. No capital expenditure was made by the department in the first quarter of 2020-21. Compared to the first quarter of 2019-20, the department saw a 155% surge in revenue expenditure at the end of June 2020. This is likely to increase further as the disbursements under the Pradhan Mantri Garib Kalyan Yojana pick up further in the coming months. The scheme, which was announced soon after the imposition of the lockdown, included several welfare measures to help the poor fight the pandemic. Under this scheme, the Department of Rural Development was required to undertake an increase in wage payments under MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act)¹. Such realigned priorities of the government need to be reflected in a set of updated budget targets for 2020-21. This would minimise discretion in spending, and help in holding the government accountable for its expenditure management.

Recasting the budget amidst a pandemic

The trends in the first quarter of 2020-21 show that even the revised borrowing target of Rs. 12 trillion is not sufficient. Greater extent of borrowing by the government may be required in the coming months to offset the rise in expenditure. The contraction in revenues has further constrained the capacity of the government to more effectively address the operational needs arising from the pandemic.

In this context, proper expenditure management by the government is important. To keep the discretion in government spending in check during these times, it would help to set more realistic budgetary targets. This exercise would capture a more relevant expectation of revenue generation amidst a pandemic, help in realigning fund allocation to priority areas, and facilitate speeding up disbursements to ministries working on the frontline. Recasting the budget numbers will also allow more accurate scrutiny of government finances to evaluate any additional fiscal stimulus measures that the government may provide in the future.

The BE for 2020-21 were released this February before the onset of the pandemic. As a result, it does not serve its intended purpose today. Typically, a set of Revised Estimates (RE) of government finances would be released next February. However, in such exceptional times, the conventional cycle of reporting budgetary targets is not sufficient. The government should release an updated estimate of budgetary numbers sooner. Further, the impact of the weak fiscal situation in 2019-20 on the government’s ability to recover revenues in 2020-21 needs to be taken into consideration. Maintaining the sanctity of the budget exercise will safeguard the feedback loop to hold the government accountable for the fiscal challenge it faces going forward.

Note:

1. MNREGA guarantees 100 days of wage-employment in a year to a rural household whose adult members are willing to do unskilled manual work at state-level statutory minimum wages.

Further Reading

• Ministry of Finance (2020a), ‘Union Budget 2020-21: Budget at a glance’, Government of India.
• Ministry of Finance (2020b), ‘Office Memorandum: Cash Management System in Central Government – Modified Exchequer Control Based Expenditure Management’, Department of Economic Affairs (Budget Division), Government of India, 8 April 2020.
• Ministry of Finance (2020c), ‘Press Communique: Revised Issuance Calendar for Marketable Dated Securities for the remaining period of H1 (May 11 - September 30, 2020)’, Department of Economic Affairs (Budget Division), Government of India, 8 May 2020.
• Controller General of Accounts (2020), ‘Provisional actuals of union government accounts at a glance as at the end of June 2020’, Ministry of Finance, Government of India.
• Controller General of Accounts (2019), ‘Provisional actuals of union government accounts at a glance as at the end of June 2019’, Ministry of Finance, Government of India.
• Controller General of Accounts (2020), ‘Provisional actuals of union government accounts for 2019-20’, Ministry of Finance, Government of India.