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Many hopes hang on the upcoming Union Budget 2017. The budget comes within months of demonetisation and we're wondering what measures the government will take to stimulate the economy.
Many believe the government will support economic growth by spending more. This makes sense since growth in private investments has flagged and private consumption is dipping. So, the only way out is the government spending more for growth.
However, this is not as straightforward as it sounds. Let me explain...
Increasing government spending to bail the economy out of trouble is not a sustainable solution. The government has a limited amount of money at its disposal. Sooner or later, these reserves will dwindle. And in the end, we'll need actual productivity to drive economic growth rather than government-infused funds.
And, our government is already weighed down by debt. Not only that, it is also struggling to meet deficit targets. For the record, fiscal deficit for FY16 is now at 4.3% of the GDP as against the budgeted number of 3.9%. It's one of the highest among the G-20, or group of 20, countries. So more government spending will actually make matters worse by increasing fiscal deficit and government debt.
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Further, government spending in India is sub-optimal. As per an article in Livemint, among the G-20, India's government expenditure as a percentage of GDP is much higher than most other countries in East and Southeast Asia. Despite that, India has lower levels of social welfare indicators than these countries.
The above data indicates that most of our government expenditure is wasteful and not being targeted-well. For example, see Vivek Kaul's view on how the Food Security Act fails to provide food security.
To sum it up, increasing government expenditure would not be the best way to drive India's economic growth. It could very well turn into a disaster and a waste of useful resources.
For economic growth to pick up, there should be growth in private sector investments. And the government should come up with initiatives that foster such growth.
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