Home / Opinion / Online-views /  Government expenditure as a share of GDP shrinks

The central government’s expenditure as a proportion of gross domestic product (GDP) has been shrinking. Central government spending, as seen from Union budgets, has fallen from 14.9% of GDP at market prices in 2011-12 to 13.4% in 2016-17, according to the revised estimates, while total expenditure is budgeted to shrink further to 12.7% of GDP in 2017-18, quite a fall. Chart 1 has the details.

The expenditure/GDP ratio has come down since the current government took over, but as the chart shows, the process started during the last years of the United Progressive Alliance (UPA) government. To be sure, the metric went up a bit during the current financial year due to the increase in pay of central government employees, but even so, the jump has been contained and the process of pruning expenditure is expected to continue to 2017-18.

Is this shrinking due to lower expenditure on subsidies, particularly the petroleum subsidy? Chart 2 shows that the central government’s expenditure, less subsidies, as a proportion of GDP has also been falling, albeit not so dramatically. This percentage moved up this year on account of the pay commission outgo, but it’s expected to fall next fiscal. So even apart from subsidies, expenditure as a proportion of GDP has been coming down.

Did lower interest rates, leading to lower interest outgo on government debt, have a hand in reducing expenditure? The key is to find out whether government expenditure less subsidies and interest payments has been declining as a proportion of GDP.

Chart 3 shows that this yardstick fell rapidly in FY13 and was further pruned during the first year of the National Democratic Alliance (NDA) government. But note that this has been budgeted to remain at 8% in FY18, the same level as in FY15, indicating the government is in no mood to shrink its expenditure further, with elections ahead. However, this metric was at 8.8% in FY07, at the height of the last boom, so there really has been some compression in central government expenditure, apart from interest payments and subsidies.

Has the quality of government expenditure improved? Chart 4 shows an uptick in the central government’s capital expenditure (capex)/GDP ratio, but it has been marginal. Note also that budgeted capex for FY18, as a proportion of GDP, is at the same level as in FY12. The much vaunted rise in capital expenditure is no big deal.

Chart 5 shows, however, that the NDA government has done really well in increasing the tax/GDP ratio, in large part due to higher excise duties on petroleum products and higher collections from service taxes. Nevertheless, after sharing with the states, the centre’s net tax revenue as a percentage of GDP has remained at 7.2% in the current fiscal year, the same percentage as in FY12. That is shown in Chart 6. In spite of a higher gross tax/GDP ratio, more of those taxes are going to the states, thanks to the finance commission recommendations.

It is important to recall that, during 2006-07, at the height of the last boom, the central government’s total expenditure/GDP ratio was 13.6%. The fiscal consolidation achieved during the boom years was frittered away as a result of the stimulus given immediately after the financial crisis. You could argue that the central government has been slowly and steadily shrinking its way towards that lost fiscal rectitude.

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