September 5, 2020 3:07:03 am
The central government accounts for the first four months of the current financial year suggest that despite imposing one of the most stringent lockdowns in the world and in spite of facing one of the severest economic slowdowns in recent history, the government’s response so far has been far more tight-fisted than that of other countries. At the aggregate level, the Centre’s total spending rose by 11.3 per cent in the April-July period — lower than even its budgeted projection of 12.7 per cent for the full year. This is nowhere close to the scale of spending required to compensate, even partly, for the economic loss during this period. The GDP data released earlier this week revealed that both private consumption and investments fell by roughly Rs 5.3 lakh crore each (at 2011-12 prices) during the first quarter over the same period last year. In comparison, government consumption expenditure rose by a mere Rs 68,387 crore — nowhere near enough to offset, even partly, the fall. It is possible that the Centre may ramp up spending in subsequent months. However, at the current juncture, given the scale of the collapse in economic activity, there is a strong case for not only front-loading its budgeted allocations, but also for drastically expanding the scale of its spending.
Much of the rise in the Centre’s spending till now has been driven by revenue expenditure, which rose by 12 per cent in the April-July period. However, in comparison, the Centre’s capital expenditure grew by a mere 3.9 per cent over the same period. Worryingly, capital spending has declined on roads and defence. Considering that the capital expenditure multipliers for both Centre and state governments are much higher than the revenue expenditure multipliers — the latter are, in fact, less than one — there is a strong case for ramping up capital spending to crowd in private sector investments. This, as the RBI notes, “induces more than proportionate increase in investments in the economy”.
It is true that government finances are constrained, and were stressed even before the pandemic hit. As against a budgeted fiscal deficit of 3.8 per cent in 2019-20, the actual deficit stood at 4.6 per cent. And going forward, while the pace of contraction in revenues will ease, government finances will continue to be strained. However, considering that of the four engines of growth, private consumption, investments, and exports were slowing down even before the COVID-19 pandemic hit, and are unlikely to witness a broad-based revival in the near term, far greater government support is needed at this current juncture. A crisis of this magnitude needs to be tackled at multiple levels. The fiscal response should involve a combination of measures — enhanced cash transfers for providing immediate but temporary relief, while at the same time, ramping up capital spending. So far, however, there has been no indication from the government on either the size or the composition of a package, if one is on the way.
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