Govt speaks one thing, its Budget actions say another

So, here’s a question: What does the central government spend the maximum amount of money on? Salaries? Pension? Defence? Education? Agriculture? Subsidies? Building infrastructure? Dear reader, the correct answer might just surprise you.

The central government spends the maximum amount of money on paying interest on its debt. Like in 2023-24, it is expected to pay Rs 10.8 lakh crore as interest. This amounts to around 24% of the government’s total budgeted expenditure for the year. Thus, almost Re 1 in every Rs 4 the government will spend during the next financial year will go towards paying interest.

Why does government spend so much money paying interest? Every year, the government runs a fiscal deficit; that is, it spends more than it earns. This difference is made up for by borrowing. And interest needs to be paid on this borrowing.

In the last few years, the government’s expenditure has gone up, without a commensurate increase in its earnings through taxes and other avenues. This has meant that the government’s borrowing has gone up, automatically leading to higher interest payment. In 2019-20, interest payment formed around 3.05% of the GDP. In 2023-24, it is expected to jump to 3.58%.

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Why has this happened? Due to the Covid pandemic, the spending by the private sector first collapsed, and then dramatically low in comparison to what it could have been if things had stayed normal.

Pre-pandemic, in 2018-19, the government’s total expenditure was Rs 23.1 lakh crore, or 12.3% of GDP. (The figures are in nominal terms, not adjusted for inflation). In 2019-20, with the pandemic just rearing its head towards the end of that financial year, it jumped to Rs 26.9 lakh crore, or 13.4% of GDP. In 2020-21, when the economy bore the brunt of the pandemic, the government upped its expenditure to Rs 35.1 lakh crore, or 17.7% of GDP. This increase led to an increase in borrowing as well, and hence, higher interest payment.

In 2023-24, the government is expected to spend Rs 45 lakh crore, or around 14.9% of GDP. So, while the government has cut its expenditure from the recent peak of 17.7% of GDP in 2020-21, it’s still higher than in pre-Covid years.

You must be wondering as to where we are going with this. In the Economic Survey published a day before the budget, it was said: “The Indian economy…appears to have moved on after its encounter with the pandemic, staging a full recovery in 2021-22…and positioning itself to ascend to the pre-pandemic growth path in 2022-23.”

How solid is the claim of full recovery? The fact that the government’s expenditure is still considerably higher than what it was pre-Covid nullifies this claim. As the old cliché goes, actions speak louder than words.

In fact, one way the government has been trying to push up economic growth is by allocating more money to capital expenditure (capex). Its capex in 2023-24 is budgeted at Rs 10.1 lakh crore, or 3.3% of GDP, considerably higher than 1.67% of GDP in 2019-20 and 1.63% in 2018-19. Theoretically, capex is money spent towards creating assets which benefit the population in the years to come. Not all of the Rs 10.1 lakh crore allocated towards capex will end up creating assets, but a lot of it will. And that is the need of the hour for an economy which hasn’t yet come out of the negative after-effects of Covid. Several economic parameters clearly tell us that.

Two-wheelers, as the Economic Survey points out, for instance, have “witnessed the lowest sales in the last 10 years”, signifying a lack of purchasing power in a significant proportion of the population. Also, in 2022, the work demanded by households under the Mahatma Gandhi National Rural Employment Guarantee Scheme, was significantly higher than in the pre-Covid years of 2018 and 2019. It was lower than the work demanded in 2021. While things have improved, we are yet to reach the pre-Covid era. And no one knows this better than the central government, irrespective of what it claims in public.

To conclude, there is no free lunch in economics. The higher expenditure will lead to higher borrowings by the central government. This, along with borrowing carried out by the state governments and other public sector entities, in an environment where household financial savings have fallen to a multi-decade low, is going to crowd out the private sector and keep interest rates high. Higher interest rates will delay the revival of capital expenditure by the private sector. But that’s a choice that the government seems to have made knowingly, though it may claim otherwise.

(The author lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics. Twitter: @kaul_vivek.)