NEW DELHI: Severe resource crunch has forced India to limit its fiscal stimulus package, to help mitigate the impact of pandemic-led lockdowns, to less than 1.5% of GDP. There are now signs are that it may have to cut its capital expenditure to make room emergency spending towards tackling the the covid-19 crisis.
An International Monetary Fund (IMF) note published earlier this month throws some light as to how countries facing financial stress can better manage their public investment spending during the ongoing crisis.
Due to the discretionary and lumpy nature of public investment, governments find it easy to cut back on such investments at a time of resource crunch. Over the years, successive Indian governments have cut their capital expenditure to contain fiscal slippage, also because it is difficult to prune revenue expenses which mostly includes salaries, pensions and state transfers.
However, it is the public investment in infra projects which create jobs and has a multiplier effect on economic activities. The IMF, in its paper titled “Managing public investment spending during the crisis”, published on 11 May, said managing these two seemingly opposing responses of public investment is complex and requires careful consideration.
“Creating fiscal space through cuts in public investment must be judiciously designed to avoid an excessively negative impact on the economy, employment, and future costs. There may also be legal and contractual impediments to reallocating funds from capital to current spending and to cancelling or postponing projects,” IMF economists Eivind Tandberg and Richard Allen wrote in the special series note on covid-19.
Mint reported on 4 May that India plans to slash this year’s budgeted capital expenditure of ₹4.1 trillion to finance covid-19 related requirements as it tries not to widen the fiscal deficit too much amid shrinking revenues. Later in an interview with Mint published on 19 May, expenditure secretary T.V. Somanathan said government will opt for expenditure switching from low priority to high priority during the current fiscal.
The IMF economists said as the covid-19 global pandemic unfolds, adjustments in public investment should focus on their efficiency, equity, and effectiveness. “Cuts should target investment projects with lower benefits (economic and social) compared to costs. The costs and benefits of the whole portfolio should be reassessed, including discontinued pre-crisis projects.”
If cuts in investment spending are unavoidable, they should be based on transparent criteria and minimize the negative impact on long-term growth, the Fund economists said. “In some cases, it may be politically opportune to retain a new, politically visible investment project, while at the same time cancelling other projects that are close to completion. Alternatively, more projects may be kept alive than are financially sustainable, and payments stretched over a longer period. Such decisions reduce the net benefits of the investment portfolio.”
A case in point could be the redevelopment of the Central Vista project to build a new Parliament house, a new central secretariat complex for ministries, and new residences for the prime minister and the vice president. The environment ministry has given its green signal for the project and the central government has notified the necessary approval for land use change.
N.R. Bhanumurthy, professor, National Institute of Public Finance and Policy, said government should postpone some of the new projects that it sanctioned for in the Budget and advance some of the projects that it thought would be complete by next year by allocating a little more resources to that. “The new projects will take four or five years to complete. Government should not put a single pie in projects like the Central Vista,” he added.