India Runs a High Government Deficit Among G-20 Countries

Jan 18, 2017

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The long-delayed goods and service (GST) tax will see the light of the day in July this year. Hopefully.

The GST reform - waiting in the wings for 16 years - is touted to provide a much-needed boost to government coffers. With the economy ailing from a slowdown, higher tax intake would support government spending at a time when private investment has come to a virtual standstill.

As India Inc remains stuck under loads of debt and low capacity utilisation levels, fresh investments have been hard to come by. Even public sector banks, overwhelmed by huge amounts of corporate loans turning bad, have not been eager to loan to this segment.

In such times, the government needs to step up public investments to break the vicious cycle and revive economic growth. But the high government deficit is becoming a millstone around its neck.

Sample this: India's government deficit to GDP ratio is higher than most G-20 countries. Therefore, any attempts of relaxing fiscal consolidation to spur demand must be weighed carefully.

The low tax intake appears to be responsible for the high government debt and deficit levels. But a more careful analysis shows this is hardly the case.

India's government revenues accounted for 21.4% of GDP in 2016. This is much less than the average of 36.4% in developed countries. But the comparison is deceptive considering India's per capita GDP of US$6,658. Per capita GDP in the UK and US was US$42,513 and US$57,293 respectively in 2016. In other words, tax earnings in an emerging economy like India have a lot of catching up to do.

One redeeming factor is that India's revenue share of GDP is higher than Southeast Asian countries such as Malaysia, Indonesia, Thailand, and the Philippines, though slightly lower than China's 27.7%. But the government's expenditure share of GDP, at 28%, is also well above the average for the region.

Is India's High Government Spending Benefitting the Economy?

And despite running a high government deficit, India continues to lag socio-economically with a widening gap between the rich and the poor. As per Credit Suisse's Global Wealth Report of 2016, India is the world's second most unequal country after Russia.

Therefore, government spending in India is sub-optimal and the intended beneficiaries are not being targeted well.

For example, my colleague Vivek Kaul has written about how the Food Security Act fails to provide food security. In fact, Vivek has written loads of articles about grossly inadequate socio-economic government policies and programs. He even recently wrote a book that critically evaluates the governance of successive governments since independence. From the front cover:

In India's Big Government, Vivek Kaul questions the apparently honest intentions under the garb of which the government approaches its policy-making and implementation.

Whether its infrastructure, primary education, agriculture, manufacturing and industry, banking, taxation, employment, labour or welfare, Kaul holds the mirror up to modern Indian governments ever since Independence.

And it's not a pretty image to behold.

He delves deep and covers a lot of ground in making the case for an India that does not deserve the government that it has, an ambitious government with a questionable track record and one which Indians have quietly accepted till date.

But things may be reaching a tipping point now, and Kaul convincingly makes the case that the government needs to totally reform itself before it leads India to disaster.

India's Big Government is a must read for anyone who has an interest in India's, and therefore their own, future.

The book is India's Big Government: The Intrusive State and How It Is Hurting Us. Now I know you are very excited to get your hands on this book right away. That's why I recommend you sign up for Vivek Kaul's Diary, a free newsletter that is usually published thrice a week. I know for a fact that Vivek's readers will get preference when it comes to claiming a personally signed hardbound copy of the book.

Data Source:Livemint, International Monetary Fund

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