Source: The post How to Boost Investment and Economic Growth has been created, based on the article “Why the budget must prioritise incentives, not just resources” published in “Indian Express” on 18th January 2025
UPSC Syllabus Topic: GS Paper3- Indian Economy and issues relating to planning, mobilisation, of resources, growth, development
Context: The article highlights the need for better-targeted government spending, public investment, tax reforms, and incentives to boost corporate and private investment. It emphasizes simplifying regulations, improving food supply chains, and addressing demand constraints to drive sustainable economic growth.
For detailed information on Addressing Key Challenges to Boost India’s Growth read this article here
What is the Current State of Government Spending?
- As of November, the central government spent only 46.2% of its capital expenditure target, compared to 58.5% in the same period last year.
- Revenue expenditure increased by about 1%, but this did not offset the slowdown in capital spending.
- States utilized only Rs 0.88 trillion of the Rs 1.5 trillion allocated for capital expenditure.
- The slowdown in public investment has impacted economic growth, despite revenue spending being maintained.
How Does Government Spending Affect the Economy?
- Government spending impacts economic growth by influencing public and private investment.
- A decrease in public investment has contributed to economic slowdowns, evidenced by a corresponding slowdown in economic growth following reductions in public spending.
- Maintaining or increasing public investment can stimulate the economy. For instance, the focus on quality spending and targeted public investment is crucial for stimulating economic activities and supporting overall economic growth.
What are the Challenges with Corporate and Private Investment?
- Low Corporate Investment: Despite tax cuts, corporate investment has not increased significantly.
- Declining Private Fixed Capital Formation: It peaked at 27.5% of GDP in 2007-08 but averaged only 21.5% from 2015-21.
- High Private Savings, Low Investment: Private corporate savings rose from 1% of GDP (pre-1990s) to 10.7% after 2005-06, yet investments remain subdued.
- Increased Non-Business Income: The share of corporate non-business income has quadrupled, indicating underutilized resources.
What Should be Done to Stimulate Economic Growth?
- Enhance Public Investment: The slowdown in economic growth correlates with reduced public investment. Prioritizing high-quality public investment can serve as an effective economic stimulus.
- Reform Tax Policies: Although corporate tax cuts haven’t significantly boosted investment, modifying tax incentives to promote investment over mere tax reductions could be more effective. For instance, introducing a tax on non-business income balanced by an investment tax credit could stimulate corporate investment.
- Utilize Agricultural Reforms: Encouraging states to implement agricultural marketing reforms and allowing direct farm gate sales have proven beneficial. These measures help diversify production and increase farmers’ profits, contributing to economic stability and growth.
- Simplify Regulations: Continuous efforts to simplify regulations at all government levels are necessary. Despite the removal of numerous outdated laws, businesses still face bureaucratic challenges that hinder their operation and growth.
Question for practice:
What measures can be taken to stimulate economic growth, considering the challenges with government spending and private investment?
