{"id":160702,"date":"2022-01-11T20:14:42","date_gmt":"2022-01-11T14:44:42","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=160702"},"modified":"2022-01-12T15:42:32","modified_gmt":"2022-01-12T10:12:32","slug":"the-difficulty-in-spending","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/the-difficulty-in-spending\/","title":{"rendered":"The difficulty in spending"},"content":{"rendered":"\n

News: <\/span><\/b>According to GDP accounting, Government consumption in the September 2021 quarter, was 17% lower than in September 2019.<\/span>\u00a0<\/span><\/p>\n

If the government spending had instead grown at the pace seen pre-Covid, the overall GDP would have been 4%\u00a0higher than in September 2019.<\/span>\u00a0<\/span><\/p>\n

Why, a shortage of funds is not the reason for this lack of spending?<\/span><\/b>\u00a0<\/span><\/h5>\n

The Govt has <\/span>unspent funds of Rs 4.7 trillion, or 2% of GDP,<\/span><\/b> with the Reserve Bank of India.<\/span>\u00a0<\/span><\/p>\n

Tax receipts<\/span><\/b> have been much <\/span>better<\/span><\/b> than estimated.<\/span>\u00a0<\/span><\/p>\n

State<\/span><\/b> governments have been <\/span>borrowing less than they were expected to<\/span><\/b> for the last two years.<\/span>\u00a0<\/span><\/p>\n

It is thus a <\/span>problem of execution<\/span><\/b>, a difficulty in spending, also visible in actual deficits turning out to be much lower than planned.<\/span>\u00a0<\/span><\/p>\n

What is the situation wrt Fiscal Deficit?<\/span><\/b>\u00a0<\/span><\/h5>\n

Revised estimates (RE) for the fiscal deficit last year (FY21) were at 4.7% of GDP.<\/span> \u00a0<\/span><\/p>\n

The estimates for this year suggest that a deficit ratio of close to 3%, and not far from the 2.5% to 3% levels seen pre-Covid.<\/span> \u00a0<\/span><\/p>\n

This <\/span>suggest that states are missing spending targets<\/span><\/b>\u00a0<\/span><\/p>\n

Expenditure may fall short of the target by 1.5% of GDP, despite the extra <\/span>spending on health and subsidy during the pandemic.<\/span>\u00a0<\/span><\/p>\n

Although, <\/span>States have a long history of missing\u00a0<\/span><\/b>expenditure targets<\/span><\/b>, and of final deficits being lower than the RE, but the gap has widened substantially in the last two years.<\/span>\u00a0<\/span><\/p>\n

Why revenue expenditure is important?<\/span><\/b>\u00a0<\/span><\/h5>\n

Higher deficits create a \u201c<\/span>crowding out\u201d<\/span><\/b> effect and thus push the interest rates up, but as the government spending has been low, the economy has not benefited from this.<\/span>\u00a0<\/span><\/p>\n

The bulk of state spending continues to be revenue expenditure, with education, social welfare, pensions and interest adding up to nearly half of total spending<\/span> and these sectors play a role as a growth catalyst in the economy.<\/span>\u00a0<\/span><\/p>\n

Also, the <\/span>expenditure<\/span><\/b> (on roads, bridges, irrigation and water supply) <\/span>has a multiplier effect.<\/span><\/b>\u00a0<\/span><\/p>\n

What may be the underlying reasons for this lack of spending?<\/span><\/b>\u00a0<\/span><\/h5>\n

Economic volatility and lockdowns<\/span><\/b> aggravated the economic challenges.<\/span>\u00a0<\/span><\/p>\n

Remote work and the hours lost due to the ravages of the disease also has a negative impact.<\/span>\u00a0<\/span><\/p>\n

What is the way forward?<\/span><\/b>\u00a0<\/span><\/h5>\n

In order to get the increased debt-to-GDP ratios to safer levels, it is important to grow the denominator (that is, the GDP).<\/span>\u00a0<\/span><\/p>\n

This can be done through <\/span>productive expenditure<\/span><\/b> rather than try to shrink government spending to reduce the numerator, which is the fiscal deficit.\u00a0<\/span>\u00a0<\/span><\/p>\n

However, such high cash balances raise the risk of governments getting tempted into <\/span>spending inefficiently.<\/span><\/b>\u00a0<\/span><\/p>\n

This <\/span>can cause economic distortions, or create permanent liabilities<\/span><\/b> (like salary increases) that can consume a lot of fiscal space for many years. <\/span>\u00a0<\/span><\/p>\n

The <\/span>fiscal health of states varies widely<\/span><\/b>, and they have to build a comprehensive plan on how to spend productively.<\/span>\u00a0<\/span><\/p>\n

Source: <\/span><\/b>This post is based on the article \u201c<\/span>The difficulty in spending\u201d\u00a0<\/span><\/b>published in Business standard<\/strong> on<\/span>\u00a011th<\/sup>\u00a0Jan 2022<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

News: According to GDP accounting, Government consumption in the September 2021 quarter, was 17% lower than in September 2019.\u00a0 If the government spending had instead grown at the pace seen pre-Covid, the overall GDP would have been 4%\u00a0higher than in September 2019.\u00a0 Why, a shortage of funds is not the reason for this lack of… Continue reading The difficulty in spending<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216],"class_list":["post-160702","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1702554969},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/160702","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=160702"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/160702\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=160702"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=160702"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=160702"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}