Indian Economy Contraction Slows despite Govt Centre pruning Expenditure

Indian Economy Contraction Slows despite Govt Centre pruning Expenditure
01/12/2020 , by , in News/Views

The pace of contraction of the Indian economy slowed significantly in second quarter – better than estimated by most economists – not because of the government support, but despite the Centre pruning its expenditure, especially capex, considered to be growth stimulant for the economy.

In September quarter, GDP contraction came at a negative 7.5% improving from a historic low of negative 23.9% in June quarter, mostly because of surprise resilience exhibited by the industry sector. However, government expenditure represented by “public administration, defence and other services” decelerated further from its June quarter level of negative 10.3% to negative 12.2% in September quarter.

From the demand side of GDP calculation, the squeezing of public expenditure is more evident as “Government Final Consumption Expenditure (GFCE)” contracted 22.2% in September quarter from 16.4% growth in June quarter. In nominal terms, this is ₹1.6 trillion drop in government expenditure in Q2 from Q1 level, including both the centre and states’ expenses.

While government’s own revenue receipts came under severe strain due to the pandemic, that could not have been an excuse for cut in government expenditure in September quarter. In May this year, just three months after presenting the Budget, the government had increased its borrowing calendar by ₹4.2 trillion to ₹12 trillion for FY21 to secure its committed expenditure in the Budget for the fiscal year.

The CGA data released on Friday shows the pruning in centre’s expenditure continues in October which may well reflect in Q3 GDP numbers to be released by end February next year. According to CGA data, total expenditure stood 54.6% of FY21 target till October compared to 59.4% during the same period in FY20. Crucially, capital expenditure which has multiplier effect on GDP growth was only 47.9% of FY21 target in the first seven months of the fiscal, against 59.5% during the same period in FY20. What is more puzzling is while it was still under-utilising its capex, the finance ministry in October as part of its second stimulus measures announced additional ₹25,000 crore spending on roads, defence infrastructure, water supply, urban development, defence infrastructure and domestically produced capital equipment.

With economic recovery faltering in October as evident from deepening contraction in core sector comprising eight infrastructure sectors, government cannot take a sustained economic recovery for granted. Though the centre by its own admission is “fiscally conservative” and is unlikely to provide a large stimulus to the economy, it should at least be supportive of the economic recovery process and not prove a drag to it.

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