The contraction of India’s public administration, defence and other services by 10.3% in the first quarter of the current financial year show that the coronavirus disease (Covid-19)-induced Rs 20.97 lakh crore economic stimulus was not strong and effective enough, consultancy firm EY India said in its latest report and called for an immediate second round of stimulus.
The latest edition of Economy Watch said rather than providing a net fiscal stimulus, the Central and state governments together provided a net fiscal “de-stimulus”.
India’s gross domestic product (GDP) growth in the first quarter of 2020-21 contracted by 23.9% mainly because of a sharp decline in various economic activities such as mining [-23.3%], manufacturing [-39.3%], construction [-50.3%], trade, hotels, transport and communication [-47%] , financial, real estate and professional services [-5.3%] and public administration, defence and other services [-10.3%].
“It may be noted that the central government had frozen dearness allowance (DA)/dearness relief (DR) payments and state governments either followed suit or even cut down on salary payments of their employees,” the report said.
On April 24, the Centre had held back payments of DA to all its employees for 18 months and proposed a similar move for state government staff to cumulatively save about Rs 1.20 lakh crore.
DK Srivastava, the chief policy advisor at EY India, said that even the stimulus was inadequate to boost the economy. “We may note that out of Rs 20.97 lakh crore, only Rs 2.02 lakh crore that is about 1% of estimated 2020-21 GDP, was net over and above what was provided for in the Union Budget 2020-21,” he said.
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He said that there was a slowdown rather than an increase in the government expenditure in the first quarter of 2020-21. “The whole idea of injecting the stimulus early in the fiscal year was to enhance government expenditure significantly above what was budgeted in a bid to overcome the contraction that was happening in private expenditure,” he said.
The Central government had taken several measures, including holding the payment of DA to its employees and prioritising spending by different ministries, in a bid to reduce public expenditure.
On June 4, it had directed all ministries not to launch any new scheme that entails capital expenditure during this financial year, and suspended already approved projects, barring those under the Rs 20.97-lakh crore stimulus package.
Earlier, on April 8, the Union finance ministry had spelled out expenditure priorities for ministries, departments and institutions under three distinct categories. The first category included the government’s arms dealing with crucial subjects such as healthcare, agriculture, food and public distribution and pharmaceuticals. They have been asked to specify expenditures for the first quarter of the current financial year in advance and strictly comply with them.
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The next category, which included over 30 ministries, departments and institutions, had been asked to restrict some of their expenditures to 20% of the budgeted amount in the first quarter of the financial year. The third category of 52 ministries and departments were asked to restrict their first quarter expenditure to 15% of their budgeted amount.
Ram Singh, a professor at the Delhi School of Economics (DSE), said that the government must step up public expenditure to boost growth.
“Yes, this is the time when the government should double its expenditure on ongoing infrastructure and healthcare projects, clear its dues to vendors and contractors to boost the economy. The move will create demand and preconditions for reviving private investments,” he said while underscoring the need for another economic stimulus.
In an interview with HT on Tuesday, finance minister Nirmala Sitharaman had said she was open to one more stimulus, if necessary. “One more may be needed is what we are hearing from the people who interact with us, and we are trying to see what it is that we can do,” she had said in the interview.
An analytical report, India: GDP slump, a warning bell for hamstrung policies, issued by the securities house Nomura, expects a second round of targeted fiscal support in the coming months. “The next round of policy stimulus is likely to be targeted and could take the form of an expanded scope of cash transfers, public employment programmes in urban areas, along with the continued focus on public investment,” it said.
Srivastava said the infusion of capital expenditures would be the most desirable method of increasing demand because it could lead to high multiplier effects both on employment and output. “In this context, both Central and state governments should participate. We may note that states’ capital expenditure contracted by (-)42.6% in the first quarter of 2020-21. The figure is based on the data from 19 states. It would be justified even when it is financed by an additional fiscal deficit. An infrastructure investment can lead to more asset creation, which can also match additional liability, ” he said.