India Budget 2017: Spending to get out of trouble

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

In January 2017, the ministry of statistics and programme implementation of the Indian government, came up with the economic growth prediction for 2016-2017 (i.e. the period between April 1, 2016 and March 31, 2017).

The numbers showed that incremental government expenditure made up for one-third of the increase in the Indian gross domestic product(GDP) in 2016-2017. What did this mean in simple English? This essentially meant that increased spending by the government would be responsible for one-third of the Indian GDP growth in 2016-2017.

In 2015-2016, the contribution of increased government expenditure to Indian economic growth was just a little over 3 per cent. Hence, what it essentially means is that in the current financial year, the Indian government will primarily drive economic growth.

And from the looks of it, this is likely to continue in 2017-2018 as well. The annual budget presented by the finance minister Arun Jaitley on February 1, 2017, seems to suggest so. Let’s look at this in some detail.

The government has allocated Rs 48,000 crore to the Mahatma Gandhi National Rural Employment Guarantee(MGNREGA) programme. The
of MGNREGA is to provide at least 100 days of guaranteed work during the course of a financial year to adult members of every rural household who are willing to do unskilled manual work.

The Rs 48,000 crore allocation to MGNREGA is the highest allocation ever made to the programme. In 2016-2017, the government had allocated Rs 38,500 crore to MGNREGA, though it will end up spending Rs 47,499 crore on it. The increased spending on MGNREGA is to alleviate the negative impact of demonetisation being felt in the rural and the semi-rural areas of India, where major part of transactions happen in cash. And after demonetisation cash has been in short supply.

It is also expected to alleviate the negative impact of demonetisation on the informal manufacturing sector which operates in cash and tends to employ many semi and unskilled people migrating from rural India. From the midnight of November 8 and 9, 2016, the Narendra Modi government demonetised Rs 500 and Rs 1,000 notes, and made them useless.

Interestingly, in 2013-2014, the Indian government had spent Rs 39,778 crore on MGNREGA. Hence, in inflation-adjusted terms, the Rs 48,000 crore allocation is around the same. Given this, the allocation to this cash for work programme is not as much as is being made out to be.

The government has also increased the allocation to the Prime Minister Housing Scheme-Rural by more than 50 per cent to Rs 23,000 crore. This is expected to create some jobs in rural India where disguised unemployment is extremely high. Close to half of India’s population is engaged in agriculture which contributes only around 18 per cent of the GDP.

On the physical infrastructure front, the government has increased the allocation to build highways by 12 per cent to Rs 64,900 crore. Further, the total capital and development expenditure of Railways has been pegged at Rs 1,31,000 crores. This includes Rs 55,000 crores provided by the government.

The allocation to 29 schemes sponsored by the central government has gone up by 21.6 per cent to Rs 3,35,461 crore, in comparison to the allocation made in 2016-2017. The allocation to the infrastructure sector has gone up by 13.5 per cent to Rs 3,96,135 crore. Also, the total resources being transferred to the States and the Union Territories with Legislatures in 2017-2018 is Rs 4.11 lakh crores, against Rs 3.60 lakh crores in this financial year, the finance minister pointed out. This is a jump of 14.2 per cent.

Over and above this, the government has increased the lending target under the Prime Minister’s Mudra Scheme by 100 per cent to Rs 2.44 lakh crore. Under this scheme, the Micro Units Development and Refinance Agency (or Mudra) provides loans at low interest rates to micro-finance institutions and non-banking finance institutions which in turn lend money to micro/small business entities engaged in manufacturing, trading and services activities.

Further, in the budget speech, the finance minister said: “I have stepped up the allocation for Capital expenditure by 25.4% over the previous year”. Also, capital expenditure will form 14.4 per cent of the total expenditure of the government in 2017-2018. This is the highest since 2008-2009. Capital expenditure leads to the creation of assets and hence, is a good thing.

Long story short—the Modi government is trying to spend its way out of trouble. Though at the same time it needs to be said that it is not going overboard with it. A part of this pump-priming became necessary because of the self-goal of demonetisation, which is expected to pull down economic growth in 2016-2017. The Economic Survey for 2016-2017 released on January 31, 2017, expects GDP growth to be between 6.5-6.75 per cent in 2016-2017. India grew by 7.9 per cent in 2015-2016. The question is what would the economic growth have been if the Modi government hadn’t scored the self-goal of demonetisation?

When pushed to a corner, most governments try to spend their way out of trouble. Nevertheless, the government spending is not always as effective as private spending. In the Indian case, a major reason is massive leakage.  A large portion of the government spending does not reach those it meant for and is siphoned off by the bureaucracy expected to distribute it.

One way of tackling this is for the government to concentrate on running a few important schemes on which it can spend a bulk of its money and focus its time and attention on. The Economic Survey points out that “the Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India.”

One negative impact of running so many schemes is that “in many cases, the poorest districts are the ones grappling with inadequate funds – this is evidence of acute misallocation. Many districts in Uttar Pradesh, Bihar, Chhattisgarh, parts of Jharkhand, eastern Maharashtra, Madhya Pradesh and Karnataka, among others, account for a large share of the poor and receive a less-than-equal share of resources”.

A very important part of economic reform in India is to bring down the number of these schemes. But that as they always say is easier said than done. And as always, this budget missed out on this opportunity as well.


The column was originally published on on February 1, 2017