Government Salaries and Bank Recapitalization more than compensate savings in subsidies
Subsidy bill could fall by around 18% in fiscal year 2016-17 on the back of the sharp drop in crude oil prices that are down over 65% over the last one year. However that savings are not likely to translate to an overall control over expenditure as the government takes on the cost of implementing 7th Pay Commission Recommendations and cost of recapitalizing state run banks that are crippled by bad loans that have risen by well over 100% for many banks over the last one year.
Total expenditure could rise by 16% in fiscal 2016-17 as compared to an estimated growth of 5.7% for fiscal 2015-16. However, the government could show lower expenditure growth if it staggers the payout on the 7th Pay Commission.
Major heads of Expenditure of the Government
Government expenditure is segregated into two broad categories, Non Plan Expenditure and Plan Expenditure. Non Plan Expenditure is by nature recurring and includes all heads that do not fall under plan expenditure. Non plan expenditure is seen as unproductive while plan expenditure is largely seen as productive as part of the expenditure helps create assets in the economy.
Non Plan Expenditure
Non plan expenditure as of fiscal 2015-16 includes the following
Interest payment on government debt is the single largest and most crippling of government expenditure. Unfortunately, interest payment, which is a non value creating expenditure, can only go higher every year as the government adds on to its debt given that it runs a fiscal deficit that is financed primarily by market borrowings. Interest payment account for 26% of total government expenditure and 35% of non plan expenditure. Interest payment is expected to account for 24% of total expenditure and 32% of non plan expenditure in fiscal 2016-17.
Subsidies, which is another non value creating expenditure accounts for 13% of total expenditure and 17% of non plan expenditure with food subsidy accounting for 54% of total subsidies, fertilizer subsidy accounting for 32% and petroleum subsidy accounting for 13%. However, unlike interest payments, subsidy bill can be brought down by the government and it is highly likely that the subsidy bill will be down in fiscal 2016-17 given the sharp drop in global crude oil prices and the almost complete pass through of petrol and diesel prices to the end user. Fuel subsidy is likely to come down by 65% and total subsidy bill is expected to drop by 18% in fiscal 2016-17.
Food subsidy bill is largely sticky given the food security act that aims to provide subsidized foodgrains to almost two thirds of the country’s population.
Fertilizer subsidy that has Urea as its highest component followed by sale of decontrolled fertilizers, is likely to come down given the fall in crude oil prices.
Defence accounts for 13% of total expenditure and 19% of non plan expenditure and given that it’s a priority for the country, the defence bill will stay high.
Seventh Pay Commission Recommendation and OROP (One Rank one Pension) Scheme if implemented in full will cost the government Rs 1120 billion assuming the government takes the load off the railways (Rs 280 billion). This is a huge bill for the government and coming at time when the government has to spend on infrastructure, it adds to the expenditure burden in the budget.
Bank Recapitalization is a must if the government wants to lend confidence to the markets on state run banks. State run banks carry a huge responsibility for the savings they manage in the economy, accounting for 77% of total bank deposits and the government must ensure that the banks manage the savings judiciously. There is an urgent need to recapitalize the banks given the sharp rise in NPA’s. Read our note on Bank NPA’s). The cost of recapitalization is expected to be over Rs 1000 billion and government could take up Rs 500 billion in the budget for fiscal 2016-17.
Plan expenditure accounts for 26% of total expenditure. Plan expenditure includes Rs 347 billion (6% of total plan outlay) on MNREGs (Mahatma Gandhi National Rural Employment Guarantee Scheme), which falls under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act).
Energy, railways and road take up 35%, 9% and 8.5% of total plan expenditure respectively. The government will ramp up spending on infrastructure in the budget with special focus on roads and power with emphasis on renewable energy.