Research cum Case Study: Analyzing Government Expenditure Trends in India (FY20-FY24)

 

Research cum Case Study: Analyzing Government Expenditure Trends in India (FY20-FY24)

Abstract

This study examines the trends in government expenditure in India over the fiscal years FY20 to FY24, focusing on revenue expenditure, major subsidies, and capital expenditure. The analysis highlights the strategic fiscal response to the COVID-19 pandemic, subsequent normalization, and a significant increase in capital expenditure to support infrastructure-led growth. It explores the implications of these expenditure patterns on fiscal stability, economic development, and welfare. The study also provides insights into the trade-offs between various expenditure components and offers policy recommendations to balance fiscal consolidation with developmental priorities.

 

Introduction
Government expenditure, a critical component of fiscal policy, serves as an instrument for economic growth and stability. In the Indian context, the Union Budget provides key insights into expenditure trends, categorized into revenue expenditure, major subsidies, and capital expenditure. This case study explores these trends over the fiscal years FY20 to FY24, analyzing their implications for the economy and offering insights into the government's strategic focus.

 

Government expenditure plays a pivotal role in shaping an economy. It influences economic growth, stability, and equity by impacting various sectors and stakeholders. Here's how it works in the economy:

 

1. Stimulating Economic Growth

• Capital Expenditure:
• Investments in infrastructure (roads, railways, power plants) boost productivity, reduce costs for businesses, and attract private investments.
• Example: Building highways facilitates faster goods movement, reducing transportation costs and increasing trade efficiency.
• Multiplier Effect:
• Government spending generates income for businesses and individuals, who then spend their income, creating further demand in the economy.
• Example: A government-funded housing project employs workers, who spend their wages on goods and services, further boosting the economy.

 

2. Maintaining Economic Stability

• Counter-Cyclical Policies:
• During recessions, increased government spending (fiscal stimulus) supports demand, preventing economic contraction.
• During booms, controlled spending curbs inflation and overheated growth.
• Example: India's fiscal expansion during the COVID-19 pandemic to support healthcare, businesses, and vulnerable populations.
• Automatic Stabilizers:
• Programs like unemployment benefits automatically increase during economic downturns, stabilizing consumption levels.

 

3. Redistributing Income and Reducing Inequality

• Social Welfare Programs:
• Expenditure on health, education, and social security ensures a safety net for the underprivileged, reducing income inequality.
• Example: Schemes like MGNREGA (employment guarantee) uplift rural populations.
• Subsidies:
• Targeted subsidies on food, fuel, and fertilizers help make essential goods affordable for low-income groups.

 

4. Enhancing Productivity and Long-Term Growth

• Human Capital Development:
• Investments in education and healthcare improve workforce skills and productivity, driving economic growth.
• Example: Mid-Day Meal Scheme in schools enhances attendance and learning outcomes.
• Technology and Innovation:
• Funding for research and development spurs innovation, creating new industries and enhancing competitiveness.

 

5. Managing Fiscal Deficit and Debt

• Government expenditure must balance short-term needs with long-term fiscal health. Excessive spending without matching revenues can lead to deficits and unsustainable debt levels.
• Efficient expenditure management ensures fiscal discipline while meeting developmental goals.

 

6. Attracting Private Investments

• Crowding In:
• Public investments in critical infrastructure or sectors can encourage private players to invest, creating a synergistic effect.
• Example: Government investment in renewable energy projects has encouraged private sector participation in solar and wind energy.
• Crowding Out (Potential Risk):
• Excessive borrowing by the government could lead to higher interest rates, discouraging private investment.

 

7. Addressing Regional Disparities

• Government expenditure can target underdeveloped regions to reduce disparities in infrastructure, education, and healthcare access.
• Example: Special grants for North-Eastern states in India have improved connectivity and development.

Government expenditure acts as a powerful tool to guide the economy toward growth, stability, and equity. Its effectiveness depends on strategic allocation, efficient implementation, and fiscal prudence to ensure long-term benefits without overburdening public finances.

 Discussion & investigation

 

	Per cent of GDP
	FY20	FY21	FY22	FY23	FY24 (PA)
Revenue Expenditure	11.7	15.5	13.6	12.8	11.8
Major Subsidies	1.1	3.6	1.9	2.0	1.4
Capital Expenditure	1.7	2.1	2.5	2.7	3.2
Source: Budget At A Glance, Various Union Budgets, Union Government Accounts At A Glance – O/o CGA
https://cga.nic.in/MonthlyReport/Published/3/2023-2024.aspx
https://www.indiabudget.gov.in/

1. Revenue Expenditure Trends
Revenue expenditure accounts for the government's operational costs, including salaries, subsidies, and interest payments.

Fiscal Year	Revenue Expenditure (% of GDP)
FY20	11.7%
FY21	15.5%
FY22	13.6%
FY23	12.8%
FY24 (PA)	11.8%

• Peak in FY21 (15.5%): This sharp rise reflects the government's response to the COVID-19 pandemic, characterized by increased health spending, direct benefit transfers, and stimulus packages.
• Decline in FY22-FY24: Post-pandemic normalization and fiscal consolidation efforts led to a steady reduction. By FY24, the projected revenue expenditure (11.8%) aligns with pre-pandemic levels, indicating improved fiscal discipline.

Implications:
Efficient management of revenue expenditure is essential to control the fiscal deficit and ensure sufficient resources for developmental initiatives.

 

2. Major Subsidies
Subsidies are a significant component of revenue expenditure, targeting sectors like food, fertilizers, and fuel.

Fiscal Year	Major Subsidies (% of GDP)
FY20	1.1%
FY21	3.6%
FY22	1.9%
FY23	2.0%
FY24 (PA)	1.4%

• Surge in FY21 (3.6%): Driven by pandemic-induced welfare measures, including free food grain distribution under the Pradhan Mantri Garib Kalyan Yojana and increased fertilizer subsidies to support farmers.
• Post-Pandemic Adjustments: Subsidy expenditure normalized to 1.4% in FY24, reflecting reduced dependency on pandemic-era relief measures.

Challenges:

• Ensuring targeted delivery to minimize leakages.
• Balancing welfare objectives with fiscal prudence.

Opportunities:

• Implementing direct benefit transfers (DBTs) can enhance efficiency and transparency in subsidy delivery.

 

3. Capital Expenditure (Capex)
Capital expenditure, which includes investments in infrastructure and asset creation, is pivotal for long-term economic growth.

Fiscal Year	Capital Expenditure (% of GDP)
FY20	1.7%
FY21	2.1%
FY22	2.5%
FY23	2.7%
FY24 (PA)	3.2%

• Gradual Increase: Capex as a percentage of GDP steadily increased from 1.7% in FY20 to a projected 3.2% in FY24.
• Focus Areas: Investment in roads, railways, housing, and renewable energy underscores the government's commitment to infrastructure-led growth. The Gati Shakti Master Plan and National Infrastructure Pipeline (NIP) are key enablers.

Economic Impacts:

1. Job Creation: Infrastructure projects generate employment and spur demand in related sectors like cement and steel.
2. Crowding-In Effect: Public investment attracts private investment, boosting economic activity.

Fiscal Implications:
While increased capex enhances growth potential, it necessitates efficient execution and prioritization to prevent cost overruns and delays.

 

4. Interplay Between Components
The interplay between revenue expenditure, subsidies, and capital expenditure determines the effectiveness of fiscal policy.

• Trade-Offs: Excessive revenue expenditure can crowd out resources for capital projects. The government's focus on reducing subsidies and controlling operational costs has facilitated higher capex allocations.
• Fiscal Consolidation: By FY24, the alignment of revenue expenditure and subsidies to sustainable levels suggests a strategic shift towards growth-oriented spending.

 

5. Key Fiscal Strategies and Their Impacts

• Pandemic Response (FY21): The government prioritized welfare and health spending to mitigate the economic fallout, leading to a temporary spike in revenue expenditure and subsidies.
• Post-Pandemic Recovery (FY22-FY24): Emphasis on capex reflects a pivot to medium- and long-term economic recovery strategies.
• Infrastructure Focus: Initiatives like PM Gati Shakti, NIP, and the Production Linked Incentive (PLI) scheme underline the government's vision of making India a manufacturing and logistics hub.

 

6. Policy Recommendations

1. Balanced Fiscal Approach: Maintain a prudent mix of revenue and capital expenditure to sustain economic growth without compromising fiscal stability.
2. Efficient Subsidy Management: Expand DBT coverage and leverage technology for targeted delivery.
3. Capex Execution: Strengthen project management frameworks to ensure timely completion and optimal utilization of funds.
4. Revenue Mobilization: Broaden the tax base and enhance tax compliance to generate resources for developmental spending.

 

7. Case Study Insights for Policy and Academia

• For Policymakers: The trends underscore the importance of aligning fiscal priorities with developmental goals. Proactive measures during crises (e.g., FY21) and sustained capex investment (e.g., FY24) highlight effective fiscal management.
• For Academics and Students: This data serves as a foundation for analyzing the impacts of fiscal policy on macroeconomic variables like GDP growth, inflation, and employment.

Discussion Questions

1. Revenue Expenditure Trends:
• What factors contributed to the spike in revenue expenditure in FY21?
• How does the gradual reduction in revenue expenditure impact fiscal deficit management?
2. Major Subsidies:
• What measures can ensure efficient delivery of subsidies while minimizing fiscal burden?
• How do subsidies impact the balance between welfare and economic growth?
3. Capital Expenditure:
• Why has the government prioritized capital expenditure in FY24?
• How does increased capital expenditure contribute to long-term economic growth?
4. Fiscal Policy Analysis:
• What lessons can be learned from the fiscal policy responses during the COVID-19 pandemic?
• How can India sustain its fiscal consolidation efforts while maintaining developmental spending?

Teaching Notes

Objective:
To enable students to understand the implications of fiscal expenditure trends and their role in economic growth and stability.

Key Themes:

1. Fiscal Policy Adaptation:
• How fiscal measures were adapted to pandemic-induced challenges and economic recovery.
2. Trade-Off Analysis:
• The balance between revenue and capital expenditure and its implications for long-term growth.
3. Policy Recommendations:
• Strategies to improve fiscal efficiency and resource allocation.

Classroom Activities:

1. Data Analysis:
• Use the expenditure data to calculate growth rates and visualize trends using graphs or charts.
2. Debate:
• Divide the class into groups to discuss whether higher subsidies or increased capex is better for long-term growth.
3. Case Study Simulation:

Assign roles (e.g., policymakers, economists, citizens) and simulate a discussion on allocating the budget for FY25

 

Recommendations

1. Optimize Revenue Expenditure

• Focus on Essential Services: Prioritize spending on healthcare, education, and social welfare while reducing unnecessary administrative costs.
• Digital Governance: Leverage technology to improve efficiency in service delivery, reducing operational expenses.

2. Efficient Subsidy Management

• Targeted Delivery: Expand Direct Benefit Transfers (DBT) to minimize leakages and ensure subsidies reach the intended beneficiaries.
• Periodic Review: Assess the impact of subsidies and phase out ineffective schemes to redirect resources toward productive uses.

3. Accelerate Capital Expenditure (Capex)

• Prioritize High-Impact Projects: Focus on infrastructure projects that stimulate economic activity, such as roads, railways, and renewable energy.
• Public-Private Partnerships (PPP): Encourage collaboration with the private sector to leverage additional resources and expertise.
• Efficient Execution: Strengthen project management frameworks to avoid cost overruns and delays.

4. Strengthen Fiscal Discipline

• Broaden Revenue Base: Increase tax compliance through digitization and simplify tax structures to encourage voluntary compliance.
• Debt Management: Monitor debt levels and maintain a sustainable debt-to-GDP ratio.

5. Foster Inclusive Growth

• Equitable Distribution: Allocate resources to underserved regions and sectors to reduce disparities and promote balanced growth.
• Employment Generation: Design capex projects to maximize job creation, particularly in labor-intensive sectors.

6. Build Resilience Against Shocks

• Contingency Planning: Establish fiscal buffers to respond to unforeseen economic shocks without compromising developmental spending.
• Climate-Resilient Investments: Incorporate sustainability into infrastructure projects to address long-term environmental challenges.

7. Enhance Transparency and Accountability

• Real-Time Monitoring: Use digital tools to track and publicly share data on government expenditure and project progress.
• Citizen Engagement: Encourage public participation in budget planning and evaluation to improve trust and ensure alignment with societal needs.

These recommendations aim to balance fiscal discipline with developmental objectives, ensuring sustainable growth and resilience in India's economy.

Additional Inputs and Insights

1. Global Context:
   Compare India's fiscal response to the pandemic with other emerging economies, such as Brazil or South Africa, to highlight similarities and differences.
2. State-Level Data:
   Include state-wise capital expenditure trends to understand the role of federalism in fiscal planning.
3. Private Sector Role:
   Analyze how public capital expenditure has influenced private sector investments, especially in infrastructure.

Future Projections:
Discuss expected trends in government expenditure for FY25 and beyond, considering India's economic goals like becoming a $5 trillion economy

Conclusion
The FY20-FY24 expenditure trends reflect the government's adaptive fiscal strategy, balancing short-term exigencies with long-term growth imperatives. The emphasis on capital expenditure, coupled with prudent revenue management, positions India for sustained economic development. However, continued focus on fiscal discipline, efficient subsidy delivery, and robust capex execution will be critical to achieving inclusive growth.

 

Sources

1. Budget at a Glance (Various Union Budgets):
• India Budget Website
2. Union Government Accounts at a Glance:
• O/o Controller General of Accounts (CGA)
3. Economic Surveys and Reports:
• Government of India, Economic Survey (Various Years)