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Poor government consumption a drag on GDP? Experts discuss

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The question to be asked is whether poor government spending is holding back gross domestic product (GDP) growth. SC Garg, former economic affairs secretary and Dr. Arvind Mayaram, currently vice chairman of Rajasthan’s Economic Transformation Advisory Council discussed this further.

Is poor government spending holding back gross domestic product (GDP) growth? For starters, if one looks at the GDP numbers from an expenditure point of view, the data show the government spending has fallen 4.8 percent in the first quarter. This is despite all others, whether private consumption, capex, export, all of grew between 15 and 45 percent in April, May and later June as well.
From the fiscal point of view as well, there is an inability on the government’s part to spend in the current year. This is when the government has collected 56 percent more taxes than even a normal pre-COVID-19 year like 2019. Add the Reserve Bank of India (RBI) dividend, the total receipts are also more in April to July, compared to the normal year or the pre COVID 2019 year.
Now the government has already got 35 percent of its fully budgeted receipts. April to July is one-third of the year. It has got one-third of the money. Credit Suisse says that in the last 24 years, the average is April to July, they actually get only 19 percent but the point is they have not been spending the money. Look at the expenditure first capex, okay, the central government's capex, yes, it rose 14 percent compared to years ago, but even at 1.28 lakh crore, it is although it is higher from 2021, it is only 23 percent of the full-year budget.
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If one-third of the year is over, why didn’t they spend 35 percent of the full-year capex. In fact, they could have even frontloaded and spent more.
Look at the total government expenditure standing at 10 trillion, it is 4.8 percent lower than last year — at a time when you should be perhaps frontloading — the government has spent only 28 percent of the full-year budget.
And Credit Suisse says that this is the lowest in a decade. And why don't they get more money to the states if the central government itself is not able to spend? Here again, the government's record is quite bad because the central government from FY19 every year, the transfer to the states have been falling. It is only April to July — and April to July FY22 is only Rs 1.65 lakh crore.
Let's look at whether the states are able to spend better than the center. No. Taking only three states — first the top two states of Maharashtra, Uttar Pradesh and then Kerala is an outlier.
First, Uttar Pradesh — the state collected its own only 23 percent of taxes, it should have done 35 percent but the center has given them only 23 percent of what is due to them from the central pool. Why not 35 percent. Grants in aid which is for specific projects have got only 8 percent of what is due to them. Center is simply not giving — anyway, Uttar Pradesh cannot complain because they've spent only 19 percent of the full year.
Maharashtra collected only 22 percent of its taxes, it has got about 25 percent from the center better than Uttar Pradesh, but still it should have been 35 percent at least. Grants in aid is a pathetic 17 percent but Maharashtra can complain because they have spent only 19 percent of the total expenses for the full year.
The outlier is Kerala. Kerala has collected taxes rather badly 19.5 percent of the full year. But the center has hardly given them any money in terms of the union share only 16 percent although one-third of the year is done. Grants in aid, they have done exceptionally well — 40 percent they have got but Kerala stands out in terms of expenditure. They have spent 33 percent, which is what every state should be spending. So, to Kerala’s credit, they have spent everything that could be possibly done.
So, the question — are center and states guilty of not being able to spend the money? Two former veterans of the finance ministry, SC Garg, former economic affairs secretary and Dr. Arvind Mayaram, currently vice chairman of Rajasthan’s Economic Transformation Advisory Council discussed this further.
According to Garg, there is a big problem. The central government in the last two years have exhibited disinterest in spending.
“Neither on the revenue side, the expenditure nor on the capital - capital expenditure of the central government is structurally sort of tied in so many knots. Whether it is defense expenditure or the metros or rails, except the road, nothing is really moving,” he said.
“Look at anything, whether it is the consumption expenditure or the investment expenditure, you don't find the government instinctively desirous of making more expenditure,” he added.
“Roads is doing well because there is a structural advantage. All the excise cess about 50 percent to 60 percent goes for the road funding. So that's going and the road is doing well. But railways is not doing well, railways expenditure is less than last year, despite a good portion of that cess going to railways as well. So, railways capital expenditure has collapsed,” Garg further mentioned.
“Last year the government gave away some money into the Jan Dhan accounts — that Rs 500 that was small but it was some expenditure. The food subsidy or the food assistance was also not a major item expenditure. If you want to support the consumption of people and to support economic growth, you have to give cash assistance to labour who is suffering. Still, we have unemployment or employment which is lesser than that. So, there are similarly grants to be given to SMEs instead of giving these loans in a roundabout way backed by the government guarantees and that has not led to any credit offtake,” Garg said.
One must remember that the government spending is not in bullet form, there are committed items. For instance, salaries will be paid throughout the year, and you need to keep provision for that, you have other committed expenditure that you need to continue to spend on, said Mayaram.
According to Mayaram, on capex in the last couple of years, the expenditure has come down significantly on account of the fact that the borrowings have gone very high and the actual expenditure and revenue do not match.
“Till December 2020, states had borrowed close to Rs 4.6 lakh crore, which is 82.5 percent higher than the previous year during the same period. So, the fiscal deficit of the states has gone up very much, their debt service capacity is reducing, their headroom to be able to use the revenues for developmental activities has decreased very sharply,” he said.
On goods and services tax (GST) compensation, Mayaram said, “In this current year the estimated compensation requirement will be about Rs 3 lakh crore, there is going to be a shortfall of about Rs 2.3 lakh crore.”
“All centrally sponsored schemes, have been reduced to 50:50, which means 50 percent share of the state and 50 of the center. And then the states must spend first before the center can or will compensate or kind of reimburse that amount. States don't have that kind of money upfront. Even center cannot spend because center itself does not have the capacity to spend very much,” Mayaram mentioned.
For the entire discussion, watch the accompanying video
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