Central Government spending shrinking

Hyderabad: Contrary to the popular belief that the central government, weighed down by burgeoning subsidies and ballooning salary bill, should be spending more year after year; the actual expenditure being incurred by the government has been shrinking in proportion to gross domestic product (GDP) over the last few years. This goes on to indicate that government’s developmental role is shrinking with every passing year.

An analysis of the central government’s annual budgets reveals that the government’s expenditure has fallen to 13.4 per cent of GDP in the financial year 2016-17 from a high of 14.9 per cent of GDP in 2011-12. This indicates a clear fall of 1.5 percentage points in the expenditure as share of GDP that the government has spent in the past six years. The expenditure/GDP ratio is projected to further fall to 12.7 per cent in the next financial year (2017-18).

It’s worth mentioning here that though the govt expenditure/GDP ratio began falling during the last years of the Congress-led United Progressive Alliance (UPA), the downward curve accelerated after the BJP-led National Democratic Alliance (NDA) took charge in 2014. And the trend is expected to continue.

But why this key ratio is going down year after year? Is it because of lower subsidy outgo on account of fall in crude oil prices? The analysis reveals, however, that it is not true that government expenditure has been falling because of lower crude import bill.

The expenditure/GDP ratio is seen falling even after deducting subsidies from total expenditure, though the fall is not as faster as when the subsidies are included. Interestingly, the quantum of expenditure without subsidies went marginally up in the current financial year on account of the pay commission outlay, but this impact will not be there in the next financial year. This clearly shows that subsidies have not played any major role in expenditure fall.

If lower subsidies are not to be blamed for the expenditure fall, what else is the reason? Has lower interests played any role? Lower interest rates will obviously reduce interest outgo on the government debt. But the government expenditure less subsidies and interest outgo has also fallen from 9.3 per cent of GDP in FY12 to 8 per cent in FY18.

As if falling expenditure/GDP ratio is not enough, the quality of government expenditure has also not been improving. Though there has been marginal increase in capital expenditure as percentage of GDP in some years, the ratio at 1.8 per cent in FY18 is same as the one in FY12. However, the NDA government, which could not reverse the trend of falling expenditure/ GDP ratio, has done exceedingly well in one area: taxes. It managed to increase tax revenues as a percentage of GDP from 10.2 per cent in FY12 to 11.3 per cent in FY18.

This spurt in tax revenues was due to increased excise duties on petroleum products and hike in service taxes. Thanks to increase in tax collections, the net tax revenues of the central government as a percentage of GDP have not come down much despite more allocations granted to the states in recent years.

By P Madhusudhan Reddy