Poor government spending reins in growth

The Central government’s behaviour appears genuinely puzzling, if one goes beyond the first-quarter GDP data to the fiscal data of April to July, that has just been released. The Centre’s tax revenues have jumped 160 percent from year-ago levels and even from the pre covid period of April-July 2019, tax revenues have grown by 156 percent. That’s a CAGR of 75 percent over two years. Yet look at the expenditure numbers

State of the fisc:  Apr-July    (In Rs trillion)

 

Government expenditure in April-July is down 4.8 percent over last year ( similar to the GDP data which showed a 4.8 percent fall in general govt consumption in April to June). Even over the past two years, central government expenditure has crawled up by less than 3 percent annually.

Looking at the GDP data, some economists have opined that states do most of the CAPEX spending and maybe they spent less. But here again, can we absolve the centre? Sample the following table

The transfers from the centre to the states have been consistently falling over the past four years. The Chief Economic Advisor threw the rule book at us when we quizzed him on CNBCTV18 saying the government in fact gave the GST compensation money out of its own kitty instead of asking the states to borrow. “We gave the states whenever they asked. We can’t do CAPEX on behalf of the states,” he said. But perhaps in a milieu of greater co-operative federalism, centre and state governments can and should plan CAPEX together.

Government spending to stimulate consumption is the need of the hour.  Private consumption accounts for 55 percent of the GDP, when calculated from the expenditure angle. Economists and investors argue that as the Indian consumer indulges in revenge buying of goods post covid, India Inc will invest more in CAPEX and a virtuous cycle of more CAPEX, leading to more employment and hence more consumption can trigger growth.

But as yet there is little evidence of that. In Q1 itself, private final consumption has grown 19.3 percent ie at the same pace as GDP. Consumption is not leading from the front. Indeed if one looked at the data from 2019, consumption has been declining by 6 percent annually. Under the circumstances, we should not be surprised that CAPEX too is down 6 percent annually over the past two years.

Exports can provide an exogenous force to trigger growth. Indeed the earnings and hirings of software companies and startups attracting moolah from global investors are expected to kickstart housing demand in Bengaluru, Hyderabad, Chennai and Pune – the traditional IT hubs- which can in turn trigger demand for more cement and more importantly for jobs in construction. And indeed exports as a share of GDP has jumped up to 21.7 percent in Q1 from around 18 percent in the previous few years.

But that is still a small part of GDP and can be vulnerable if global growth slows because of the delta virus.

The services sector is the source of most jobs in India since it accounts for 60 percent of the GDP. The entry “Trade hotels, transport, communication and broadcasting that accounts for about 18 percent of the GDP is still 30 percent below pre-covid levels. It is the loss of momentum in this space that is denying job opportunities and hurting consumption. The government simply needs to chip, especially since there is a surprising spurt in tax collection. As Dr Pronab Sen pointed out, the government needs to spur consumption by spending more on MNREGS and by transferring more to states who may spend on small irrigation works that can generate jobs quickly.

The CEA in his interview pointed out that government CAPEX spend in the April-July period is up 14 percent from a year ago,  to Rs 1.28 trillion. But this is still only 23 percent of the government total Capex commitment this year of Rs 5.54 trillion. One third of the year is done by July, but the government had completed only 23 percent of its budgeted CAPEX, when it should actually have been front loading.

And here’s more evidence of the government not charging in to fiscally stimulate the economy. Its fiscal deficit April-July is only 20 percent of the full year. In the past two decades, the government’s deficit in the first four months has averaged 50 percent of the full-year deficit. What’s worse, unspent government balances of Rs2-3 trillion have been sloshing around in the banking system almost every day of the past 4 months.

This needs to change. If ever there was a need to front-load fiscal spending and deficits, now is the time. Let's accept the charitable explanation that government staff too were hurt by COVID-19 and hence didn’t have the bandwidth to spend till July. The good news then is we have levers to rev up the economy. The question is will the government grab it with both hands.