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Home / News / India /  Big decline in govt capex is pulling down the economy

The pace of contraction of the Indian economy slowed significantly in the September quarter (Q2) and was better than estimated by most economists. However, it did not happen because of government support but despite the government pruning its expenditure, especially capex, which is considered a growth stimulant for the economy.

In Q2, India’s gross domestic product (GDP) shrank 7.5%. This was a contraction, but it was nevertheless better than the historic 23.9% contraction in Q1 and was mostly because of the surprise resilience exhibited by the industrial sector. However, government expenditure represented by “public administration, defence and other services" decelerated further from -10.3% in Q1 to -12.2% in Q2.

From the demand side of GDP calculation, the squeezing of public expenditure is more evident as government final consumption expenditure contracted 22.2% in Q2 compared to a 16.4% growth in Q1. In nominal terms, this is a 1.6 trillion drop in government expenditure in Q2 from the Q1 level, including both the Centre’s and states’ expenses. This means that while the government had started unlocking the economy in June, signalling resumption of private production and consumption activities, and was announcing a raft of stimulus measures, it was actually cutting down its own budgeted expenditure instead of supporting economic recovery. It is now clear that had the government at least stuck to its pace of budgeted expenditure in Q2, the recovery in the quarter would have been faster.

The government’s own revenue receipts came under severe strain because of the pandemic, but that could not have been an excuse for the cut in government expenditure in Q2. In May, just three months after the Budget, the Centre had increased its borrowing plan by 4.2 trillion to 12 trillion for FY21 to secure its committed expenditure in the Budget for the fiscal.

Data released by the Controller General of Accounts (CGA) on Friday shows that the pruning in Centre’s expenditure continued in October. This may well reflect in Q3 GDP numbers to be released by the end of February. According to CGA data, the total expenditure stood at 54.6% of the FY21 target till October, compared to 59.4% during the same period in FY20. Capital expenditure, which has a multiplier effect on GDP growth, was only 47.9% of the FY21 target in the first seven months of the fiscal, against 59.5% during the same period in FY20.

It is more puzzling that while it was still under-utilizing capex, the finance ministry in October, as part of its second stimulus measures, announced an additional 25,000 crore spending on roads, defence infra, among others.

With economic recovery faltering in October as is evident from the deepening contraction in the core sector, the government cannot take a sustained recovery for granted. Though the Centre, by its own admission, is “fiscally conservative" and is unlikely to provide a large stimulus to the economy, it should at least be supportive of the recovery process and not prove a drag to it.

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