Why the Government is Not Spending

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.