Budget Series || Government Spending

India is the 3rd largest economy in terms of PPP only after China & USA. India is home to almost 18% of world population. Around 50% of the population in India is less than 35 years of age. The percentage of people below poverty line in India also has reduced tremendously from around 37% to less than 20% in 2019. All these facts paint a rosy picture about the Indian economic scenario. However, the per capita income of India is meager 2000 USD which is much less than most of the emerging and developed nations in the world. As per Oxfam report, 77% of the total wealth in India is owned by 10% of the population and 70% of the wealth created in 2017 belonged to 1% of the population. This brings out a stark inequality existent in the Indian structure and makes a strong pitch itself to Indian government to spend more for the poor people to provide basic amenities like health, education etc.

Not only in India but in most of the countries, government’s spending on various welfare schemes and resource building form a significant proportion in their total GDP. However, in emerging economies like India, it becomes difficult for government to spend beyond a certain level as they always run a fiscal deficit and they try to limit it.

The change of the government in 2014 had brought a shift in policies and the attitude of government in implementation and conceptualising various schemes. Narendra Modi led BJP government has always believed that state should be a facilitator for business and it has no role to be in business. In that line, government has reduced stake in many businesses and divested many loss making business. The boost in infrastructure spending and various welfare schemes like PM Ujwala Yojana, Ayushman Bharat(also known as Modicare) etc have highlighted priorities of the government.

Share of Indian central government as a percentage of GDP has always been in the range of 9-12%. However, in the recent past few quarters, to compensate the slowdown in the economy government spending has increased but within the limits of fiscal deficit. The percentage growth in the government spending YoY has increased at a much higher rate than the GDP growth. The lingering problems of banking sector and most of the banks being state owned has limited the capabilities of the government to spend money in the development sector. After the recent merger of banks from 10 to 4 has brought most of the banks out of the PCA Framework, which restricts the banks to lend freely due to insufficient capital requirements will open the hands of the government to spend in other fields.

In the previous 2 budgets, government has introduced various schemes like PM Matsya Sampada Yojana to improve infrastructure in fisheries sector to address critical value chain issues. In 2018, government announced its target of doubling the farmers income by 2022 by increasing the MSP for various agricultural products. Government allocated 1.38 lakh crores for spending in Health, Education and Social security in 2018-19. To support the daily wage workers who, in general, don’t save for future or not able to save for their retirement are sanctioned under PM Karam Yogi Maandhan Scheme in 2019-20.

At this point, when the rural consumption is falling, savings rates are coming down and economy is slowing, government should take the lead to increase its expenditure on various schemes which can eventually increase the disposable income in the hands of people. At the same time, the focus towards long term targets like improving the quality of life of farmers and workers in other allied agricultural sectors which employs around 50% of the workforce, improving the quality of education, health facilities etc should not be compromised. The spending on the infrastructure facilities for farmers should be improved and availability of credit to business should be made easier by reducing the transaction costs. MSMEs which employ a majority of the workforce should be given platforms to compete and gain scale to increase their businesses. BJP government has been able to maintain the fiscal discipline in a much better way over the past 5-6 years, however, it should let go off the fiscal target for one year and spend to ignite the spark of the economic engine which is passing through a winter morning.