How Much Is India Spending to Keep the Economy Going?

From the Bottom of the Pyramid to the Predominance of the Middle Class

The report characterizes India as a growing income economy, transforming from the bottom of the pyramid to a predominantly middle-class-driven economy.

The emergence of the middle class in centre stage would translate into 25 million households escaping the poverty trap.

This consumption-led growth is believed to be concentrated in urban pockets, densely populated cities, and rapidly developing rural towns.

“There will be an opportunity to unlock nearly USD 1.2 trillion of spend in developed rural areas by improving infrastructure and providing access to organised and online retail,”- WEF.

However, some critical areas need increased focus, like skill building, economic upliftment of rural India and creating a sustainable economic system for Indian citizens.

Firing on (many) Cylinders

Another factor propelling growth is Government spending, especially on infrastructure like roadways, waterways, airways, railways and highways, the farm sector and healthcare.

“The World has recognised the Indian economy as a bright star. Our current year's economic growth is estimated to be at 7%. Notably, this is the highest among all the major economies.” - Nirmala Sitharaman during the 2023 Amrit Kaal Budget.

A massive leap in this direction is the government’s launch of a slew of projects, with colossal fund allocation by the government.

Besides, private spending is another dimension of the expenditure contributing to development which agrees with Keynesian economists' views.

The Keynesian Multiplier Effect

The Keynesian multiplier effect expounds that an increase in private consumption expenditure or net government spending increases the total Gross Domestic Product (GDP) by a higher quantum than the amount of spending or expenditure.

A recent India Ratings & Research report confirms this increased private and government spending: ‘Over the past few years, private final consumption expenditure and government final consumption expenditure have been the primary growth drivers of Indian economic growth.’

This is just what the doctor ordered. We shall now look into some of the spending parameters:

Roadways and Highways 

The Ministry of Road Transport and Highways has received a 36 per cent increase in its budgetary allocation, supporting achieving the 25,000-km road development target set in the Budget.

The 2023 budget has significantly increased infrastructure expenditure, with 16.6 per cent of total spending and 2.5 per cent of GDP dedicated to infrastructure, an increase from the previous year.

Infrastructure investment, including roadways and highways, is expected to have a multiplier effect. As a result, each rupee spent on capital expenditure has an immediate-year multiplier effect of INR 2.45 and INR 3.14 in subsequent years, contributing to employment generation, aggregate demand, and economic growth.

India's reputation as the fastest highway developer in the world, constructing almost 27 km of highways daily, highlights its commitment to infrastructure development.

The Budget 2019-20 allocated Rs. 19,000 crores to the Pradhan Mantri Gram Sadak Yojna (PMGSY), boosting rural road construction.

Enhanced fiscal spending on infrastructure is anticipated to significantly contribute to GDP growth and narrow the infrastructure gap with China.

Fulfilling Every Individual’s Dream to Fly

The government’s UDAAN scheme has contributed to the growth of air traffic from Tier-II and III cities, with their share increasing from 28 per cent in April 2015 to 36 per cent in November 2022.

India now has many airports across the country, evenly distributed in the metros, Tier 2 and Tier 3 cities. It has enabled the common man’s aspirations to fly.

Adding 50 more airports will have a multiplier effect, generating demand for other industries and supporting long-term economic growth and employment opportunities.

According to the International Air Transport Association (IATA), India is expected to overtake the UK to become the world’s third-largest aviation market by 2025, one year earlier than initially expected. However, global factors like volatile crude prices that would adversely impact aviation fuel prices might play spoilsport.

Thrust to Waterways

The Indian government is making significant investments in connecting waterways, capitalizing on the country's abundance of rivers and coastal regions.

This focus on waterway development includes the flagship scheme of Sagarmala, aimed at modernizing ports along the coast and improving import-export cargo handling.

Notably, container freight movement has commenced on inland waterways between Kolkata and Varanasi, marking a significant milestone in India's transportation infrastructure.

Additionally, the government's emphasis on waterway development will enhance connectivity and boost inland trade and transportation.

The increased spending on connecting waterways will facilitate quicker handling of import and export cargo at ports, foster economic growth, and open up new opportunities for trade and commerce across different regions of the country.

Spending on Railway

Railways remain the primary transportation mode for most Indian populace, especially in rural areas. Consequently, the Budget saw an apex push of 6% towards railways.

Education

Noticing the growing significance of AI today, the government announced the establishment of three Centers of Excellence for AI in top educational institutes, which will serve as specialized hubs for research, development, and innovation. 

If a woman is educated, then two families are educated, and when every family is educated, the whole country is educated. Considering this benefit, the Government has consistently allocated higher funds towards the popular Beti Bachao Beti Padhao scheme.

Healthcare Initiatives

Under the healthcare initiative, 157 new nursing colleges will be co-located with existing medical colleges. This will address the shortage of frontline medical professionals and bridge the required nurses per bed gap. New healthcare facilities will also be created in tier 2 and 3 cities.

Further, a mission to alleviate sickle cell anaemia 2047 by 2047, which includes universal screening in affected tribal areas, has been announced. The budget allocated Rs. 89,155 crore to the health sector, a 13% increase from the previous year.

The Department of Health and Family Welfare received Rs. 86,175 crore, while the Department of Health Research received Rs. 2,980 crore. 

Crowding Effect Is Not Justified

One might argue that the enhanced Government spending is resulting in private sector access to capital getting expensive.

However, this is not true. The private sector investment is slightly muted, mainly due to global uncertainties like trade disputes, fluctuation in oil prices, rupee depreciation, and the rise of global protectionism.

Realizing that the government's fiscal spending in the proper channels would help achieve more equitable and well-balanced growth with improved social indicators is essential.

The economic upliftment would result in newly found purchasing power in the hands of low-income people, ultimately boosting consumption and business profit.

Panic about Unemployment is Unwarranted

A specific section of economists believes that India is facing an unemployment problem. However, a large number of economists say that this is a crooked picture. Unemployment in India is essentially a population problem. It is not possible to create 100% jobs for an ever-growing population.

Further, the government is giving a fillip to entrepreneurship with its flagship Startup India Program.

Towards a More Sustainable and Equitable Growth

The high social impact spending by the government is already witnessing transformational results on the ground.

Additionally, a predominantly young demography and a burgeoning middle class with significant purchasing power contribute to consumption growth.

The government aims to channel resources towards productive avenues like welfare schemes and infrastructure building, yielding rich dividends in the future.

Thus, it might be more appropriate to term it as public sector investment in public utilities like clean water, sanitation, farm sector, healthcare and most importantly, infrastructure, unlike mere spending on subsidies.

“It (India) will remain one of the youngest nations on the planet and be home to more than one billion internet users.

The new Indian consumer will be more affluent and more willing to spend, and unlike her predecessors, she will have particular preferences’ – WEF report predicting 4x consumer spending in India by 2030.

Indeed, India remains an exciting market with healthy growth prospects.