Expecting only govt to push GDP growth would be antithesis to capital set-up, private sector should also spend on capex

The government appears to be the only entity driving the investment cycle and all data on investment gets linked to these efforts.

Madan Sabnavis February 06, 2019 13:26:48 IST
Expecting only govt to push GDP growth would be antithesis to capital set-up, private sector should also spend on capex
  • The share of the government sector in GDP is around 11 percent which means that the basic thrust comes from the private sector

  • The primary role of the government is to bring about development through budgets with the focus on redistribution

  • The role of the state has been defined as one of redistribution which means that it collects taxes and uses it for development purposes

A column written in Business Standard by noted economist and member of the Economic Advisory Council to the Prime Minister (PMEAC) Rathin Roy on the diminishing fiscal space of the government in formulating budgets since 2014-15 merits attention and some discussion. The point made is that over the years the central government’s role has diminished in size as depicted by the ratio of total expenditure to GDP.

While the decline is not very significant it is trending downwards for sure which is interesting. Also given the amount of committed expenditure of the government in the form of fixed payments and transfers to the state, there is not much left for spending on discretionary heads. These are fair points made but leads to a broader question of what is the role of the government in a country like India which is driven by private enterprise.

The role of the state has theoretically been defined as one of redistribution which means that it collects taxes and other income and uses it for social and development purposes. But over time it was found to be responsible for the creation of infrastructure too and hence there was an additional dimension added.

The question was who will build roads and keep the railways moving but the government as they require high costs with long gestation periods and low returns being social goods. Hence the expanded role gave a different flavour to the Budget. Governments also were overcome with enthusiasm and played up to this role with eloquent statements in the Budget and separate sections were devoted to the thrust on infrastructure – both rural and urban.

Expecting only govt to push GDP growth would be antithesis to capital setup private sector should also spend on capex

Representational image. Reuters.

In the last few years with several private projects getting stuck and resulting in NPAs, the government appears to be the only entity driving the investment cycle and all data on investment gets linked to these efforts.

Now if one looks at the share of capex in total expenditure of the central government it is around 13 percent while the rest is revenue expenditure. Clearly, there is less space for capex and when the self-imposed norms of FRBM are on the verge of being breached such expenditure is compromised at the margin to meet targets. It is then we say there is little ‘fiscal space’ available for productive expenditure.

The issue is that we start with the wrong premise that the role of government is to spend on capex. It is actually the duty of the private sector to do so while government chips in as a secondary source in areas where the private sector would not venture. Sectors like power, telecom, mining, airports, ports etc. should ideally be left to the private sector, while roads, railways fall within the purview of the central government and water supply, sanitation etc. in the domain of urban local bodies and panchayats.

Interestingly the government decorates budgets by talking big numbers on infrastructure spending but accommodates nothing more than Rs 3.36 lakh crore on capex in an overall outlay of Rs 27.84 lakh crore of which Rs 1 lakh crore is on defence) in the Interim Budget for FY20. The rest is either rhetoric where long timelines are drawn up which are extended periodically or reckoned by extra-budgetary sources where PSUs come in and borrow money and help in its creation. This is not government debt technically and is excluded from the fiscal math.

As these borrowings or financing is done by these PSUs the clock does tick but not from the budget. It is necessary to distinguish between the two. The fiscal space has hence been expanded dexterously to bring about such investment which is from the public sector enterprises which are not the government.  Hence borrowings of National Highways Authority of India (NHAI), Power Finance Corp (PFC), Power Grid, NTPC etc. are extended arms of the government. Therefore, the thrust of the government to infra still remains, albeit outside the budget.

Committed expenditure comes in the form of subsidies (Rs 3.34 lakh crore), interest payments (Rs 6.65 lakh core ), defence (Rs 4.3 lakh crore), social programmes under the regime which can go with names of various leaders or just the PM (upwards of Rs 4 lakh cr). When the government spends on police, education, health, etc, there is a big salary component which gets affected by Pay Commissions recommendations. Therefore after taking in statutory transfers as centrally sponsored schemes or grants, not much gets left over.

As we move more towards being a welfare state this becomes pronounced. While it may easy to criticise governments for giving largesse, it is the duty of the party which comes to power based on such promises to deliver. Governments draft policies to let private enterprise thrive and give several sops in all sectors. This is where government policies should be evaluated and the plethora of reforms brought in by the present regime has been remarkable.

The share of the government sector in GDP is around 11 percent which means that the basic thrust comes from the private sector. Hence there is a degree of ambivalence when forming judgments here where too much is expected from the central government.

Curiously if one looks at the last few years of GDP composition the component of public administration has been the leading sector. Therefore while one may complain about high revenue expenditure the same actually contributes to GDP growth as consumption increases. Therefore lamenting the committed part may not be fair as all money is finally spent and not hoarded.

When state governments give cycles or sewing machines there is demand being created for these industries and hence there is a productive use of the funds. Cash transfers help to increase income and spending and are not really a drag on GDP though arguably the same can be spent on capital expenditure to strengthen the foundation for future growth.

To conclude it must be reiterated that the primary role of the government is to bring about development through budgets with the focus on redistribution. Spending on projects is done albeit to a limited extent as government policies provide a fair playing field to the private sector to drive growth. A country with several disadvantaged sections requires such support. By turning things around and expecting the government to grow the economy would be an anti-thesis to a capitalist set up, which we have adopted. Looked at this way, highlighting the diminishing fiscal space in the context of doing big-bang investment spending may be misplaced.

(The writer is Chief Economist, Care Ratings)

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