Cash-rich government likely to loosen its purse strings, may also reduce borrowings

CAIRNS: After two years of massive spending cuts that knocked the wind out of an already slowing economy, the finance ministry is ready to give ministries their full budget and even reduce market borrowing if the current pace of growth can be maintained.

This could itself spark off a virtuous cycle of higher government spending contributing to revival after two years of growth that slumped to decadal lows of below-5%. The Indian economy expanded by a two-year high of 5.7% in the first quarter of the current fiscal.

“You cannot have three years of continuous expenditure cut,” Finance Secretary Arvind Mayaram told ET on the sidelines of the G20 finance ministers’ meeting, indicating that the finance ministry may be willing to offer some room to ministries and departments on spending.

The government has already reduced first-half borrowing by Rs 16,000 crore and may not borrow this at all if things go according to plan.

“If growth maintains the pace and remains 5.6-5.7% in the second quarter as well, we may not need to (borrow the remaining Rs 16,000 crore in the first half),” Mayaram said, adding that it was too early to take a decision on this.


The Centre’s second-half borrowing target is likely to be announced later this week and the government may stay with the one announced in the interim budget, or even top it up with the Rs 16,000 crore less it looks set to borrow in the first half to be on the safe side.

The government had budgeted to borrow Rs 3.68 trillion in the first half and Rs 2.32 trillion in the second half for a total of Rs 6 trillion according to the interim budget that the new government adopted in its final budget.

The Narendra Modi-led government could also look at retiring old debt to lower its interest outgo as part of fiscal management if ministries are unable to spend their allocation and there is a surplus.

This will also give the government room to clear Rs 12,000 crore in central sales tax (CST) dues owed to states, which could strongly boost prospects of their assent to goods & services tax (GST), which the Centre wants to implement as quickly as possible.

ET has reported that the government was confident about meeting its fiscal deficit target of 4.1% of GDP, about which there had been some concern when Finance Minister Arun Jaitley presented his maiden budget on July 10.

Ministries and departments were forced to cope with huge spending cuts in the past two financial years and some level of austerity before that as the government fought to keep the fiscal deficit in check in a desperate bid to avoid a ratings downgrade. As much as Rs 1 trillion of plan spending was cut in each of the two years as part of the fiscal consolidation drive.

However, expenditure will have to be rational and in a prudent manner, the finance secretary said, indicating that quality of spending will be a key focus of the new government.

A commission has already been set up to review government spending. All this will be contingent on revenue inflow, which is expected to see a pickup on the back of a revival in growth and also from stake sales in government companies.

If revenue flows surpass expectations, the government could also look at retiring some debt to bring down interest costs, which will have a positive effect on India’s sovereign rating.

The government has budgeted for a growth rate of 16.9% in tax collections to Rs 13.6 trillion. In the first four months of the year, the government has collected only 15% of budgeted taxes but August numbers are much better. Indirect taxes, a key economic indicator, grew 9%, more than double rate in first four months.

The Reserve Bank of India has also transferred its entire surplus of Rs 52,679 crore to the government’s kitty against the Rs 62,414 crore budgeted for the full year from public sector banks and the central bank as dividend and surplus. The Cabinet has cleared stake sales in ONGC, SAIL and Coal India that alone will help raise as much as the Rs 43,425 crore budgeted from the disinvestment of state-owned companies on the back of booming stock markets. Residual stake sales in Balco and Hindustan Zinc are also expected to fetch more than the budgeted Rs 15,000 crore. Subsidies that have been a huge challenge in the past few years are expected to remain in check this year with crude oil prices subdued and diesel price getting market-linked.