28th October 2022 (8 Topics)
How the State’s room for Expenditure is related to growth in the economy?
Context
With the global economic situation and weakening demand in advanced nations, as well as ongoing aggressive monetary tightening by central banks, the States' effective investments can increase their expenditure, which will have a significant impact on the speed of the Indian economy.
About
The States and Expenditure:
- The ability of states to increase capital investment and take advantage of fiscal space may become a crucial factor in the country's overall fiscal impetus at this time.
- The investigation was conducted among rising state economies such as Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal, which account for 85 percent of India's GDP.
How State Expenditure Can Help for Growing Economy?
In reaction to the financial downturn and its influence on the economy, the government plays a critical role by raising expenditures to stimulate economic growth. Some of the roles are:
- Ensures a well-functioning legal and political system: Any economy experiencing political or economic turbulence is not favorable to economic growth since people have little faith in the economy. Furthermore, the economy is unclear, and individuals are reluctant to invest.
- Lays forth the regulatory role in ensuring a competitive market: Certain laws should be in place to prevent the economy from devolving into a monopolistic position. The government must consider trade policies with other nations, as well as laws on natural resources accessible in our country.
- Stimulate the economy by increasing government expenditure: This was one of the ideologies advanced by the great economist John Maynard Keynes. He believed that the government's participation is critical "when the economy is in recession or a depression-like situation and the government should increase spending to have a pickup in economic activity."
Impact of government spending on the economy
- Rise in Expenditure and Growth: There is a good chance that tax increases will cancel out the impact of higher government expenditure, leaving Aggregate Demand (AD) unchanged. However, increased spending and tax increases may result in an increase in GDP.
- During economic downturns: In a recession, consumers may curtail spending, resulting in an increase in private-sector savings. As a result, tax increases may not lower spending as much as previously thought.
- The Multiplier Effect: Increased government expenditure can have a multiplier impact. If government investment leads to job creation, the jobless will have more money to spend, increasing aggregate demand even more. In certain cases of surplus capacity in the economy, government expenditure may result in a greater ultimate gain in GDP than the original injection.
Possible implications:
- Can crowd out Private sector lending: However, if the economy is at full capacity, an increase in government expenditure will tend to drown out the private sector, resulting in no net rise in aggregate demand from the transition from private to government spending.
- Inappropriate allocation of funds: Some economists claim that increased government expenditure through higher taxes would result in a more inefficient allocation of resources since governments are less successful at spending money.
- Increase in Off-Budget Borrowings: Off-budget borrowings by states are loans obtained by its entities, special purpose vehicles, and so on, which are anticipated to be repaid by the state government's own budget rather than the borrowing entity's cash flows or income.
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The Union government has indicated that off-budget borrowings would henceforth be deemed state government borrowing and subject to the rules of Article 293(3) of the Indian Constitution. |
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