Why the Government is Not Spending

Business Standard     22nd October 2020     Save    

Context:  There is an expectation that the government will significantly increase spending on account of economic decline due to the pandemic; however, there are reasons for its less than expected spending.

Some government steps to revive the economy

  • An economical package worth over Rs 20 trillion: focusing on providing relief to the most vulnerable sections of the population.
  • Announcements related to leaving travel allowance for government employees
  • Increase in capital expenditure by Rs 25,000 crore.

Reasons for government to restrain from more spending

  • High fiscal deficit: The International Monetary Fund (IMF) predicts that the budget deficit in India is likely to expand to 13.1% of Gross Domestic Product (GDP) (global average of 12.7% of GDP).
  • Revenue loss: because of lower economic activity since India went ahead with the harshest lockdown in the world.
  • Situation not specific to India: According to IMF, public investment is expected to fall in over 70 emerging markets and developing countries this year.
  • Structural fiscal inefficacies
  • Cannot borrow like the developed countries:
  • Borrowing cost for India will be more than for advanced economies like the US
  • High inflation risks in India.
  • India doesn’t have the “exorbitant privilege” of owning a reserve currency.
  • Increase in infrastructure spending may not revive the growth: because of the problems associated with project implementation in developing economies.
  • High level of public debt (about 90% of GDP) may lower the multiplier effect of debt-financed public spending.

Conclusion:  India has serious policy constraints and is not in a position to aggressively support growth. Thus, a reversal in the containment of the pandemic could significantly worsen the economic outlook.