The second advance estimates of national income show that gross domestic product (GDP) is likely to grow at 6.98% in 2018-19. This is the slowest growth in five years, and even this wouldn’t have been possible without fast growth in government expenditure. Mint decodes the situation.
How fast is government expenditure growing?
At the most basic level, GDP of an economy is the sum of private consumption expenditure, investment, government expenditure and net exports (exports minus imports). An increase in any of these pushes up GDP.
Take a look at the above chart. The government expenditure for this fiscal is expected to grow at 8.87%, whereas GDP is likely to grow at 6.98%. In 2017-18, government expenditure grew at 14.97%, while GDP grew at 7.17%. So, an increase in government expenditure basically pumped up GDP growth to a large extent in 2017-18 and to some extent in 2018-19.
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When was the last time this happened?
The last time growth in government expenditure was faster than overall GDP growth for two consecutive years or more was between 2007-08 and 2009-10. This was the period before, during and after the breakout of the 2008 financial crisis, when Wall Street investment bank Lehman Brothers went bust, leading to a global economic slowdown. In 2008-09, overall GDP growth was 3.09%, whereas growth in government expenditure was 11.36%. Of course, 2017-18 and 2018-19 have been nothing like the global financial crisis years, but economic growth has still required a major push from the government.
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What proportion of GDP does government expenditure constitute?
Government expenditure does not make up for a large part of GDP. Data over the years suggests that it typically accounts for 10-11% of GDP.
How fast is the non-government part of GDP growing?
The non-government part of GDP constitutes around 90%. In the current fiscal, it is expected to grow by 6.76%; in 2017-18, it grew at a rate of 6.32%. The last time the non-government part of the economy grew slower than the overall GDP for two consecutive years or more was between 2007-08 and 2009-10, that is, during the period of the financial crisis. This is another good indicator of the fact that all has not been well with the Indian economy for the last two years.
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Why is the rise in government expenditure not pushing up fiscal deficit?
This is because a lot of revenue, as well as capital expenditure of the government, is now kept outside its budget. The Comptroller and Auditor General (CAG) highlighted this in a report. This style of pushing up growth by raising government expenditure is not sustainable. In 2017-18, government expenditure went up 14.97%, while GDP growth was at 7.17%. In 2018-19, it is likely to rise to 8.87% and GDP growth is expected to be at 6.98%.
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Vivek Kaul is an economist and the author of the Easy Money trilogy.