In a pandemic year, the thumb-rules of Budget planning do not apply. Expenditure may have been low in the first half but will shoot up as the year comes to an end. There are unforeseen measures such as increased fertiliser subsidies and export incentives payment where substantial arrears are being cleared, along with revenue consequences of the duty changes in edible oils. So, the low expenditure in the first quarters cannot be assumed as savings. Also, the spend on healthcare and Covid-19 vaccination would be substantially higher than the ₹35,000-crore estimated in the Budget. In an exclusive interview with BusinessLine , Finance Secretary TV Somanathan spoke about how normal equations will not be used to arrive at the revised estimate for the current fiscal and budget estimate for the next fiscal. Excerpts:

What is your sense of the economy, where are we at right now?

My sense is that the worst effects of the second Covid wave have receded and the economy is back on track for a relatively normal second half of the financial year. However, there are some sectors which are not yet back to normal such as contact services, but most of the economy is back to a trajectory seen during non-Covid times. Even in specified sectors, you have a mixed picture in some positive sense like there is domestic tourism has picked up, domestic air travel is quite robust, hotels are seeing good bookings. In the absence of international inbound tourism, the focus has shifted to domestic tourism and we saw growth. We would probably be growing faster than most pessimists have been predicting.

Does the fear of a third wave cloud the finalisation of the next Budget?

One cannot rule it out. I am not a health expert but prudence demands that we look at all possible scenarios. Having said that, I do believe that recurrence of the third wave in the magnitude of the second wave is now very remote because of the pace of vaccinations.

The fact is that even though there are cases, the number of critical cases, fatalities and cases requiring long hospitalisations are likely to be much fewer because of the coverage of vaccination across the adult population. All available evidence suggests that adults are more vulnerable than children. So, I think that the possibility of a big third wave hitting us has receded, but we cannot say it is zilch and rule it out. However, it is not a very big factor in our planning.

Expenditure during the first half is low and yet to cross the half halfway mark. Will expenditure and fiscal deficit be lower this year?

I have seen this commentary and a lot of people go by what I would describe as the current run rate of expenditure. I think it should be accessed like a limited-over cricket match where the run rate which you see at the 35th over will not be proportional to the last 15 overs. We are entering into the slog over phase for the financial year.

The first few months of the current fiscal were defined by the pandemic. The first quarter was a washout. We took some precautionary steps but these restrictions have now been removed. I think we will end the year with a fiscal deficit that is close to BE.

Yes, there is increased revenue but there are increased expenditure commitments too, and these are not necessarily on the same lines that we had in the Budget. For example, we will see a big increase in fertiliser subsidies and export incentive payment where we are clearing substantial arrears.

There have been some revenue consequences on edible oils with the duty changes. They are quite substantial. Also, restrictions on expenditure typically follow a catch-up when they are lifted. So the low expenditure in the second quarter should not naturally be assumed as savings. It may not get saved and may actually get caught up in third and fourth quarters for development schemes. Overall, I am still looking at aggregate expenditure to be higher than the Budget.

Conventionally, the six-month expenditure number is used for finalising revised estimate and expenditure in April-November for the first BE draft. Will we follow the same pattern this year?

We are not going by these thumb-rules this year. We know that this year’s first half was characterised by some natural phenomenon in the first quarter and some restrictions in the second quarter. So, that cannot be the basis for our estimations. We will not say some departments have spent only X, so they will spend only 2X or 2.2 X in the remaining period. We have to be rational and assume that the second half may be very different from the first half. We are not necessarily applying any crude or traditional rules as this is a very different year.

Norms that are applicable in a normal year may not apply in such an abnormal year. So, we are using intelligent estimates customised to each situation to assess what is likely to happen in a particular programme or to a ministry, given what has taken place, and then plan for what is likely to happen. This makes the entire exercise much more complex. The ability to apply a simple quantitative formula of estimation is impaired. So, we have to do a lot more work to get to the reasonable estimates.

Capital expenditure in the Budget does not seem to present an actual number, as some items such as grants-in-aid for creation of capital assets by ministries and departments are categorised as revenue expenditure despite resulting in creation of capital assets. Is there a need to change this?

We need to work on this. It is too early for me to say what we can or should do. Some part of what we do is capital in its economic outcomes but revenue in the budget classification. For example, when we give grants-in-aid for irrigation projects, the project is definitely capital from an economic point of view but in government accounting, it is revenue because it is not a share or investment or a bond from our perspective. So, your point has a lot of merit but we need to find the best way of assessing what we do, and commentators ought to also interpret it holistically.

What kind of expenditure can we expect on vaccination?

It will be quite a bit higher than ₹35,000 crore projected in the Budget. Definitely, there will be supplementary requests in the next session of Parliament.

With buoyancy in revenue collection, can we expect some rate cut, especially in GST?

The big event in GST is the end of the compensation period in June 2022. The revenue buoyancy you see also has to be viewed according to the level of revenue that the States need next year to stay where they are in terms of reaching their 2021-22 revenue and where they should be in 2022-23. So, it is not obvious that rate cuts are likely.

Read also: No thumb-rules to prepare estimates this year, says Finance Secretary TV Somanathan

 

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