💰 India Spent Less Than 50% of Its Budget!

The government has put a brake on spending. Here's how this is going to impact us.

The multiple waves of Covid have been spoiling our plans and delaying our goals since 2020.

But we're not the only ones impacted. The government also has been unable to do much of what it had planned.

And like your cancelled plans have helped you save money, so have the government's. However, their savings might not necessarily be a good thing. 

Decline in Government Spending

The government had big plans when it laid down the 2021 budget. It planned to spend over Rs. 5.54 lakh crores this financial year on capital investments. 34.5% more than last year. It aimed to revamp the country by heavily investing in infrastructure and building roads, railways, and what not. 

But as Covid kept hitting the country, much of the infrastructure development was stalled. After all, this is not something that can be done while socially distancing or from home. 

This has led to the biggest difference in the amount the government had planned to spend and the amount it actually did in the last 4 years. It has spent less than half the amount until November 2021. 

And it was not just infrastructure spending that was impacted. Almost all sectors saw a decline in spending. In other words, a decline of growth.

You see, when the government plans on spending money on building roads, it gives the contract to construction companies. These companies get business, so they hire more people. The employees that have just been hired now have money that they can spend on their needs and wants. So, basically, the money keeps trickling down and empowers the economy.

This is exactly why when the government had announced the budget, the stock market had rallied. Investors had expected that such huge spending would boost the economy.

But sadly, this didn't happen. And the impact of this poor spending was visible in the very first quarter of the year itself. India logged in a nominal GDP of 20.1%, failing to meet the first-quarter GDP target of 20.4% set by the RBI. 

While Covid took all the blame, there could be more than meets the eye. One of the reasons the government could have shied away from spending was that it would add more liquidity into the economy.

Umm, ReadOn, isn't that kind of the point of government spending?

Well, yes. But you also need to understand the economic scenario. The RBI has been keeping interest rates low for a long time now to help us borrow money easily. This has already increased the liquidity in the market and pushed inflation rates high. So, increased government spending, in this case, could have done more harm than good.

Future Plans

While we had a rocky start, the country's nominal GDP is set to reach 17.6%, higher than the anticipated 14.4%. So, with the GDP on track what will the government do with all the extra money it has? 

It cannot give this money back to us. But it could still spend this money on economic growth.

Yes, this would add to our already increasing inflation. But if the RBI increases interest rates in tandem (as is expected), then the inflation problem would be solved.

In fact, investors are counting on the fact that government spending will increase and capital goods companies will receive massive contracts soon. This is probably why companies like India Cements, Alok Industries, Varroc Engineering, and Adani Green have been rallying.

But some experts suggest it is almost impossible for the government to spend this much money in just a four-month period (from November to March). Especially with the new wave of Omicron sweeping through the country.

So, they believe that a lot of this money will go towards offsetting our fiscal deficit. 

A fiscal deficit is basically the difference between how much the government has earned and how much it has spent. And since government spending boosts economic growth, most countries spend more than they have (a practice commoners like us should avoid). This adds to our fiscal deficit.

Now, though it seems like a bad thing, a fiscal deficit of 3%-4% of the GDP is often good for the economy. However, our fiscal deficit is currently projected at 6.8% of the GDP. 

This is much less than last year's fiscal deficit, which stood at 9.3% of the GDP. But it is still pretty high and decreasing it could also benefit the country. Wondering how?

You see, when the fiscal deficit is high the government has to find ways to increase its revenue. And since we are the government's primary revenue source, this deficit comes to pinch our pockets through hikes in petrol and diesel prices and an increase in other taxes.

So, if the government manages to reduce the deficit we won't have to bear the brunt of extra taxes any time soon. 

Now, the only question is what will the government prioritise: Long term growth or reducing the fiscal deficit? Or will it be a mix of both?

Only time will tell…

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