The Enormous Extra Spend In Budget Is An Illusion

Nirmala Sitharaman said: "We have spent, we have spent and we have spent." She had every reason to claim that, since the budget numbers show that the centre spent Rs 4.1 lakh crore, or 13 percent above what it had planned for last year. Additional spending will continue this year: expenditure is estimated to go up by 14.5 percent in 2021-2022 compared to last year, even though the government's revenue is expected to drop by 12 percent. That's why people are hailing it as an "expansionary" budget that will stimulate demand in the economy.

Economists and pundits have also praised the Finance Minister for coming clean on subsidies. It is an open secret that successive Finance Ministers have made their fiscal deficits look smaller by taking a chunk of food and fertilizer subsidies off the books - and asking Food Corporation of India (FCI) and fertiliser companies to borrow the rest. This year, Ms Sitharaman has decided to end that practice and account for the entire food subsidy in the budget itself.

Ironically, it is this very transparency which has helped create the illusion that the government is spending much more.

Let's start with the so-called additional spending in this fiscal which ends on March 31. Of the Rs 4.1 lakh crore additional expenditure in this fiscal, about Rs 3 lakh crore was spent on additional food subsidy (over and above what was announced in the budget). You would think this is because of the free food the Modi government gave to millions of poor people in the first few months of the lockdown. But you'd be wrong. About half of this extra spend was given to Food Corporation of India (FCI) for old dues. Take that out, and the additional expenditure drops to Rs 2.6 lakh crore.

Take the fertiliser subsidy. It went up by nearly Rs 63,000 crore or 88 percent compared to what was budgeted. Surely, farmers didn't use almost twice as much fertiliser as was estimated? No, about Rs 50,000 crore of this additional expenditure went to clear old dues to fertiliser companies. Take that out, and the additional spending drops to Rs 2.1 lakh crore.

Mind you, even this is an inflated number. Budget 2020 allocated just Rs 78,000 crore to FCI for its food subsidy expenses. This is despite the fact that FCI's actual food subsidy cost was almost twice that much in the previous year, and was likely to be at least Rs 1.5 lakh crore in 2020-21. If, like now, the Finance Minister had been transparent about the food subsidy bill in last year's budget, her total expenses would have risen by at least Rs 70-80,000 crore.

If you adjust for that, the additional spending in FY 2021 was just about Rs 1.3-1.4 lakh crore or a measly 0.7 percent of GDP. That means, real additional spending which would have made a difference on the ground was a third of what the government is claiming.

Now let's look at the spending announced for FY 2022. The numbers tell us that the government will send Rs 34.8 lakh crore, which is about Rs 4.4 lakh crore more than last year's estimates. This year, the government is not only declaring its actual food subsidy outgo, but perhaps also clearing some more of FCI's long-pending dues.

So the total food subsidy bill is increasing by Rs 1.25 lakh crore, which is 29 percent of the total additional expenditure. Remember this is partly an illusion created by the fact that only half the actual food subsidy estimate was booked in the budget last year. So the real increase is much lower. Another one lakh crore rupees will cover interest costs, since the government has had to borrow more this year. That is 23 percent of the total additional spending.

To this, add the Rs 35,000 one-time expenditure on the Coronavirus vaccine. Strangely, although this has been counted as part of the huge increase in the 'health and wellness' budget, it has been clubbed under Finance Ministry's grants to states. The vaccine expense accounts for 9 percent of the extra spending. Again, while this is a crucial expenditure to fight the pandemic, it has to be seen more as a defensive counter-measure, than actual spending in building health infrastructure.

Together, these three heads - additional 'spending' caused by transparent booking of the food subsidy, increased interest cost and the vaccine - account for more than 60 percent of the additional expenditure in 2021-22. Remove these and you are left with just Rs 1.77 lakh crore of real additional economic stimulus. This is just 0.8 percent of GDP.

This real extra spending will be divided amongst projects to build highways and roads, the Jal Jeevan Mission to provide safe drinking water, a new development finance institution called NABFid, and providing credit to MSMEs. The amounts are not meagre, but they aren't big enough to trigger a significant boost to either employment or demand.

In reality, the total additional expenditure is way below what other countries have provided in the COVID-driven recession. India is amongst the worst-affected economies this year. If the government believes that it has done enough in this budget, then it is trapped in an illusion of its own creation.

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels.)

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