7th Pay Commission report and more in focus as Centre’s spending quality falls

The increased pace of revenue spending has been despite the decontrol of fuel prices, relatively benign global oil prices and the PAHAL scheme for LPG, which all helped reduce petroleum subsidy.

The Centre’s revenue expenditure — largely of the routine but sticky nature like those on interest payments, pensions and upkeep of assets — had hit the decade’s lowest growth rate of 4.8% in FY16, but has since surged, constraining its ability to accelerate capex. The increased pace of revenue spending has been despite the decontrol of fuel prices, relatively benign global oil prices and the PAHAL scheme for LPG, which all helped reduce petroleum subsidy.

The pay commission-induced salary hikes for the Centre’s staff is one reason for the increase in revenue expenditure in FY17 and to a lesser extent so far in the current fiscal. Sources said front-loading of subsidy payments on food, fertiliser and fuel has inflated the revenue spending in the current year.

The Centre’s capital expenditure growth, which took a hit in FY17, has already shown some signs of improvement with a growth of about 20% so far in FY18. Capex, pegged at about Rs 3 lakh crore in FY18, is budgeted to grow just 6% in FY18. However, sources said, full-year capex growth could be higher than budgeted if the government decides to borrow more than budgeted in the last quarter of this year to pep up the economy.

The quality of expenditure has always been an issue for the central government, which used to cut capital spending rather than revenue spending to meet the budgeted fiscal deficit targets. Faced with subdued revenue receipts and runaway subsidy bills, the Centre had to cut spending by over Rs 1 lakh crore in each year between FY13 and FY15, to meet respective deficit targets.

The Centre’s capex is below 15% of its total budget size, while ideally the figure should be much higher.

After the Narendra Modi government came to power in May 2014, it tried to push capital spending and effected a 29% rise in FY16. But the capex growth halved in the subsequent year as revenue expenditure growth doubled to 9.5%.

With private investment hard to come by, the central public sector enterprises kept public expenditure robust. The central PSUs invested Rs 3.2 lakh crore and Rs 4 lakh crore in FY16 and FY17, respectively, compared with Rs 2.53 lakh crore and Rs 2.9 lakh crore in FY16 and FY17, respectively, by the Centre.

As a percentage of GDP, capital expenditure is projected to remain at around 1.8% of GDP in the medium term, the government said in its medium-term expenditure framework recently, indicating that it has turned less ambitious on capex acceleration. Recently, the finance ministry extracted a pledge from CPSEs to spend an extra Rs 25,000 crore this year, over and above their initial capex budget of Rs 3.85 lakh crore.