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Quality of Public Expenditure

 

Quality of Public Expenditure


Introduction

The Reserve Bank of India (RBI) recently released a study on the Quality of Public Expenditure (QPE) Index, highlighting improvements in government spending efficiency since 1991. The report underscores the positive impact of fiscal discipline and increased capital expenditure (capex) on India’s economic growth and social development.

What is Socio-Economic Expenditure?

Socio-economic expenditure refers to government spending aimed at improving social and economic outcomes, such as education, healthcare, infrastructure, and welfare schemes. It includes:

  • Capital Expenditure (Capex): Investments in infrastructure like roads, railways, and ports.

  • Revenue Expenditure: Day-to-day spending on salaries, subsidies, and welfare programs.

  • Development Expenditure: Long-term investments in education, healthcare, and research & development.

  • Interest Payments: Costs incurred due to past borrowings.

  • Subsidies: Financial support for essential goods and services like food and fuel.

Trends in India’s Socio-Economic Expenditure

  1. Capital Outlay to GDP Ratio: Increased from 1.5% in 2000 to 2.5% in 2023, reflecting higher infrastructure spending.

  2. Revenue Expenditure to Capital Outlay Ratio: Declined from 8:1 in 2000 to 5:1 in 2023, indicating better spending quality.

  3. Development Expenditure to GDP Ratio: Rose from 6% in 2000 to 8% in 2023, driven by investments in health and education.

  4. Interest Payments to Total Expenditure Ratio: Fell from 25% in 2000 to 20% in 2023 due to fiscal consolidation.

  5. State-Level Spending: Increased post-14th Finance Commission recommendations, with higher fiscal devolution to states.

Positive Outcomes of Improved Public Expenditure

  • Economic Growth: Higher capex boosted GDP growth, averaging 6.5% annually since 2000.

  • Infrastructure Development: Improved road, rail, and port connectivity enhanced trade and mobility.

  • Social Indicators: Increased spending on health and education improved literacy (77.7% in 2023) and life expectancy (70 years).

  • Fiscal Discipline: The Fiscal Responsibility and Budget Management (FRBM) Act (2003) reduced fiscal deficits, stabilizing debt-to-GDP ratios.

  • Crisis Management: Counter-cyclical spending during the 2008 Global Financial Crisis and COVID-19 mitigated economic shocks.

Challenges to the Quality of Public Expenditure

  • Revenue Deficit: Persistent revenue deficits (3.3% of GDP in 2023) limit funds for capex.

  • Freebies and Subsidies: Rising populist measures strain fiscal resources.

  • Inefficient Spending: Leakages in welfare schemes like MGNREGA and PDS reduce effectiveness.

  • Debt Burden: High interest payments (20% of total expenditure) constrain developmental spending.

  • State-Level Disparities: Uneven fiscal capacity among states affects equitable development.

Way Ahead

  1. Boost Capex: Increase capital expenditure to 3% of GDP to sustain infrastructure growth.

  2. Rationalize Subsidies: Implement direct benefit transfers (DBT) to reduce leakages.

  3. Fiscal Federalism: Strengthen state finances through higher devolution and grants.

  4. Monitor Spending: Use technology for real-time tracking of expenditure outcomes.

  5. Reform FRBM Act: Focus on debt-to-GDP targets and flexible deficit limits during crises.

Conclusion

India’s quality of public expenditure has improved significantly since 1991, driven by fiscal discipline and higher capex. However, challenges like revenue deficits and inefficient spending persist. By rationalizing subsidies, boosting capex, and strengthening fiscal federalism, India can ensure sustainable and inclusive growth.

Multiple Choice Questions (MCQs) for UPSC CSE

  1. What does the term 'Quality of Public Expenditure' primarily refer to? a) Increase in government salaries
    b) Efficient allocation and utilization of government spending
    c) Higher interest payments on loans
    d) Reduction in foreign investment
    Answer: b) Efficient allocation and utilization of government spending

  2. Which of the following best defines 'Capital Expenditure' (Capex)? a) Daily operational expenses of the government
    b) Long-term investments in infrastructure and productive assets
    c) Financial support for food and fuel subsidies
    d) Government’s interest payments
    Answer: b) Long-term investments in infrastructure and productive assets

  3. Which fiscal policy framework helped improve India's public expenditure management? a) Goods and Services Tax (GST)
    b) Fiscal Responsibility and Budget Management (FRBM) Act
    c) Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)
    d) National Health Mission (NHM)
    Answer: b) Fiscal Responsibility and Budget Management (FRBM) Act

  4. What is the primary objective of the Direct Benefit Transfer (DBT) scheme? a) Increase interest rates on government loans
    b) Reduce leakages in subsidy distribution
    c) Enhance government salaries
    d) Eliminate private sector involvement in welfare schemes
    Answer: b) Reduce leakages in subsidy distribution

Mains Question

What are the key challenges affecting the quality of public expenditure in India? Discuss the measures needed to improve fiscal efficiency while ensuring inclusive growth. (250 words)

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