Union Finance Minister Nirmala Sitaraman seems to have a tough task before her if she has to fulfil the wishes of Prime Minister Narendra Modi while presenting a fresh budget for 2019-20. The prime minister has clearly told a group of economists and sectors experts about his intention to undertake fresh reform measures to boost growth and make the Indian economy competitive. This would require a radically different trend in the government’s budgeting exercise which is traditionally loaded on non-developmental expenditure and high debt servicing costs.

When the Narendra Modi government first came to power in May 2014, he decided to focus on financial and social inclusion that became extremely popular in the country. The national government’s expenditure management was mainly left with the professionals in the North Block.

The latter seemed to have been less comfortable and innovative about successfully managing and implementing the government policies and handling additional pressures created by the award of the Seventh Pay Commission, demonetisation of large currency notes, digitisation of economy and indirect tax reform through GST.

The pay commission’s recommendations on pay, pension hikes for 4.7 million employees and 5.3 million pensioners alone brought a heavy annual burden on the expenditure side. The government failed to link the pay hikes with the employees’ performance or productivity.

There were little pressure on government employees, including officers and top bureaucrats, to perform better to cover additional pay package. The pay and pension increases ranged from 14 to 23.50 percent. Entry-level basic pay more than doubled to Rs.18,000 per month and at the level of cabinet secretary, the top-most civil servant, to Rs.2.5 lakh from Rs.90,000 per month.

The government’s expenditure budget in the last five years went on expanding with very little link with productivity and development. The first year’s budget expenditure of the Modi government in 2014-15 was Rs. 17.95 lakh crore. The amount was Rs.1.30 lakh crore more than the Manmohan Singh-led UPA government’s last budget in 2013-14. The fiscal profligacy continued even under the Modi 0.1 period. Of the 2014-15 budget expenditure, non-plan expenditure was as high as Rs.12.20 lakh crore against a net tax revenue to the centre of only Rs.9.22 lakh crore.

The 2019-20 budget may see the government’s gross expenditure topping the Rs.28 lakh crore mark, or around Rs.10 lakh crore more than its budget spending, five years ago. The worst part of this fiscal profligacy is that over 70 percent of the budget expenditure continues to be under non-development category.

The budget of 2017-18 was marked by two important changes. It was advanced to February 1 from the traditional February 28. It also abolished the age-old plan and non-plan expenditure classifications and replaced them by ‘revenue expenditure’ and ‘capex’.

The massive borrowing and the government’s continuously forced disinvestment in the public sector by making high net worth PSEs buying government stakes into each other in the absence of market support to fund routine annual increase in budget expenditure are hurting the government’s as well as PSEs’ development programmes.

The  government is spending around 25 percent of its total budgeted expenditure towards interest payment on loans. Fatter the expenditure budget the higher are loan components and loan service costs.  This huge loan liability is severely impinging on the government’s ability to provide more funds for poverty alleviation and development-oriented programmes. 

Former finance minister Arun Jaitley pegged the government’s borrowing for 2018-19 at over Rs. 6.24 lakh crore. More than 92 percent of this amount was meant to be spent on interest on the already running loans of the government. The government had reportedly borrowed 115 percent of its total estimated borrowing limit in the first 8 months of the last financial year.

The government’s interest payment liability alone is equal to almost 40 percent of its total projected net revenue receipts. This huge liability leaves very little room for the government to spend on developmental schemes. In last year’s budget, the previous finance minister had pegged the central government’s capital outlay at Rs three lakh crore and its interest payment liability at nearly twice the amount. It’s a kind of debt trap as the country is forced to borrow over Rs.6,00,000 crore every year to meet its interest payment obligations. The practice is unhealthy and must not continue.

Finance Minister Sitaraman must break away from the trend to control the wasteful or non-productive expenditure on the administration. It is high time to tighten the expenditure belt of the government, make sarkari jobs productivity-oriented and let the budget focus more on development. That will create large gainful employment, raise public income, spurt domestic demand and create higher production and growth. She should encourage the core and manufacturing sectors, including PSEs, to expand substantially in the coming years while compressing the government’s non-productive expenditure supported by borrowing and disinvestment at the cost of PSEs. The task is not easy.

A good part of her 2019-20 revenue earning prospect had already been hijacked by the previous NDA government by way of advance collection of revenues by the departments like the railways and forcing PSEs part with dividends meant for the current financial year. This may be possibly responsible for the government’s fiscal deficit in the first two months (April-May) rising to 52 percent of the entire budgeted target for 2019-20 and posing a new challenge to the centre.

The US embargo on oil and other trades with Iran, a growing war like situation in the West Asian gulf region, rising oil prices and the spectre of drought owing to highly delayed monsoon threaten to bring an unidentifiable impact on the government’s expenditure target during the current financial year. Ms. Sitaraman’s expenditure budget must provide for such an impact without compromising on development.