The finance ministry placed its Mid-Year Review of the Economy before Parliament on Tuesday, the last day of the session. This is now a mandatory requirement under the Fiscal Responsibility and Budget Management (FRBM) Act, giving the country a chance to assess the state of the government’s finances against the backdrop of the overall macroeconomic environment. The Review estimates that growth during the current year will be 7 per cent or more, which is towards the optimistic end of the range, and probably an over-estimate. What this means is that, given that the economy grew by 7.8 per cent during the first two quarters of the year, the ministry expects it to grow by a significantly lower 6.2 per cent or thereabouts during the second half. But given how much the business tempo has changed after September, with sales falling in key sectors and prices on a downswing on account of lack of demand, the country will be lucky to reach the 7 per cent mark for the year as a whole. The second problem with the Review is that, while it discusses a number of domestic and external factors that will influence the performance of the economy over the coming months, it stops short of making a forecast for the next fiscal year. It is important to know what the government thinks on this issue, because many observers feel that the next year will be substantially worse than the current year.
The fiscal situation needs some attention, Going by the expenditure data till the end of September, ie, for the first half of the year, 45 per cent of Plan expenditure and 47 per cent of non-Plan budgetary allocations had been spent. This is not bad, but increasing government expenditure is a critical component of a policy response to slowing growth. Apart from the fiscal stimulus package that was announced earlier this month as well as a follow-up that is being anticipated, the government should focus on accelerating the disposition of resources that are already available to it through budgetary approval. The low-hanging fruit here are clearly ministries and departments that have spent a relatively small proportion of their budget allocations in the first half of the year. Of the larger ministries, the biggest laggard in spending is the human resource development ministry, which had spent only 30 per cent of its annual Plan allocation of over Rs 34,000 crore in the first six months. The ministries of power and panchayati raj, which had smaller but still substantial plan allocations, had spent only 20 per cent and 28 per cent, respectively, until end-September. The health and family welfare ministry had spent only 40 per cent of its Rs. 16,000 crore annual Plan allocation. The finance ministry, with a huge allocation of over Rs. 49,000 crore, had managed to spend 43 per cent of it. Only the ministries of rural development and urban development were significantly ahead of the clock with their Plan expenditures.
The essence of any fiscal stimulus is speed. There is little point in announcing new initiatives, even assuming the resources are available, if they are subject to the political and administrative constraints and bottlenecks that plague the system. The government must give priority to ensuring that money that has already been allocated is spent quickly. In particular, projects that involve construction activity, with all the industrial and employment linkages that they have, must be got off the ground as soon as possible.