The RBI’s November Bulletin has an interesting research piece on the impact of government’s revenue and capital expenditure on growth.
The study concludes that the revenue and capital expenditures under the PM Garib Kalyan Yojana, the Anna Yojana or the free food transfers and the three atmanirbhar packages can push up GDP by 159 basis points this year and by 158 basis points next year (This means growth would have contracted by a further 1.6 percentage points this year had it not been for these measures).
The article says that RBI’s studies show that a one rupee increase in revenue expenditure has a one rupee impact on government’s final consumption expenditure (or GFCE, which on average accounts for about 12-13 percent of India’s GDP). However when revenue expenditure is increased it is at the cost of capital expenditure and hence the gains from a one rupee rise in revenue expenditure gets reduced to 45 paise.
The study goes on to say that a one rupee increase in capital expenditure by the central government leads to a 2.45 rupees rise in GDP in year one and a Rs 3.14 rise in GDP in the next year. For states, a one rupee rise in government capital expenditure leads a Rs2 gain in GDP.
The RBI bulletin report says that the central government’s revenue expenditure has gone up by 1 percent in the first half, despite a steep fall in receipts to 25 percent of BE. Normally central government collects 40 percent of its budgeted revenues in the first half.
However, Centre’s capital expenditure fell by 11.6 percent in the first half. The study says the states have also maintained their revenue expenditure despite receipts shortfalls, mainly by reprioritising their expenses - postponing DA and salary payments, etc. However, states capital expenditure have fallen by 40 percent this year.
In fact, the study points out that central capital expenditure has been falling since 2011-12 except for the two years --FY16 and FY17, while state governments’ capex has been falling continuously and sharply since 2011-12.
The study concludes with an earnest plea that the government should continue with its revenue expenditure this year to support the fragile recovery and the capital expenditure by Centre and state governments that has collapsed in the first half must be scaled up as a priority through public expenditure in healthcare, education, social housing and environment.