India’s government is spending like there’s no tomorrow

Government spending or expenditure includes all government consumption, investment, and transfer payments. In the Indian economy, government expenditure accounts for 10% of GDP.

Since the non-governmental sector is not showing any signs of improvement since 2017, in accordance with Keynesian theory, the government has ramped up its spending. While the rest of the components lag far behind the desired growth rate, government spending has gone up by 15.7%. This spending spree has been going on since late 2016/ early 2017. In the 2017-18 fiscal year (FY17), government spending went up by 15.1% followed by a rise of 9.25% in FY18.

This is troubling for more than a few reasons. Firstly, this means that the poor GDP growth figures seem even worse when we account for the fact that most of it is being driven by the increase in government spending. If growth rate of the non-government component alone is considered; (which makes up 90% of GDP) it stands at a painful 2.95%. This is far below the GDP growth rate of 4.5% in FY19.

The government component accounts for merely 10% of the GDP. So, any ‘reasonable’ amount spent by the government is unlikely to make a dent in the economy. Moreover, the government does not have unlimited funds, and the current fiscal policy is not suited for this level of spending.

As the economy stagnates, the tax revenue is also proving to be a problem. From April till Oct’19, the government had collected $139.9B in tax revenue and did not meet its $327B tax goal in the FY19.

“Overall, there is likely to be shortfall of Rs. 3.5 – 3.75 lakh crore ($46.5B- $49.9B) in gross tax collections of the Centre. Therefore, revision of fiscal deficit goal of 3.3 per cent by 0.5 per cent to 0.7 per cent appears quite inevitable.”

-Mr. Subhash Chandra Garg, former finance secretary

The dividend from the RBI of $23.4B and earnings from disinvestment might lessen the load on the government. This, however is not a sane or sustainable strategy in the long run. The current trend of rapid disinvestment and privatisation of PSUs as well as arguments with the RBI over loans to the government seem to strengthen the notion that the government is spending beyond its means and must stop.

The government has to ensure that the financial environment of the country is stabilised to encourage growth of the non government i.e.; private consumption and investment sectors of the economy as their performance is crucial for a healthy GDP figure.