A life without government is 'nasty, brutish and short.'
This undisputed Hobbesian view found its way even into public finance. And before we knew it, the size of the State, measured as government expenditure to GDP, has grown enormously.
For decades, tax-GDP ratio was nailed near the floorboard at 10-11%, while public expenditure perched itself one block higher at 26-28% of GDP. If expenditure is nearly double the income, it should mean superior public services, right? Wrong. As confirmed by none other than former Prime Minister Rajiv Gandhi himself, less than 15 paise of every rupee of expenditure actually reached the intended poor during the 1980s.
Rajiv was the first to break the bad news four decades ago, but the trend continues even now. Which explains why despite our 'Big State,' the quality of public services including education, healthcare and rural development isn't up to snuff.
Promising an overhaul, Prime Minister Narendra Modi, in 2014, fashioned the phrase that government has no business to do business, and championed 'minimum government and maximum governance'. Ten years down the line, the size of the State has begun shrinking, though India's transition from a mixed economy to a free market economy still has a country mile to cover.
There's no proven 'optimal' size of public spending if we want a government that maximized growth. Economists consider the quality of public services as a benchmark, but for India's finance ministers that's a challenge because the first charge on the treasury is not towards welfare measures, but interest payments, which also happens to be the largest component, excluding state transfers.
Of the total expenditure in FY23, nearly 60% was earmarked for interest payments, pensions, subsidies, and state transfers, effectively leaving just Rs 40 out of every Rs 100 the government earns (debt included) for social services. When the UPA government relinquished office in 2014, it was about 70:30, which justifies why critical healthcare and education remain severely underfunded.
Consider healthcare. The globally accepted norm for government spending on healthcare is 3% of GDP, which even the 2021 Economic Survey recommended. Taking the estimated FY23 nominal GDP of Rs 273 lakh crore, government healthcare expenditure should be roughly Rs 8 lakh crore. Given that India's healthcare spending is split in a 3:7 ratio between the centre and the states, the union's component should be about Rs 2.4 lakh crore. In contrast, the FY23 budget allocation stood at Rs 86,600 crore.
The government is cognizant and in its 2017 National Health Policy, it had rightly envisaged to increase healthcare expenditure to 2.5% of GDP by 2025. But if we were to meet this target, allocations must straightaway double in each of the next two budgets.
Likewise, expenditure on education has been falling behind the benchmark 6% target for decades. First mooted by the Kothari Commission in 1968, and endorsed by subsequent National Education Policies, the 6% target remains out of bounds. In FY23, the earmarked Rs 1.04 lakh crore budget accounted for just 2.5% of the total government expenditure. Reaching at least the halfway mark of the 6% target is essential given the prevailing need for skilled manpower to support the growing economy. The private sector presence has taken some load off the government's shoulder, but the fact remains that improving primary education and skilling India's youth needs a necessary fresh wind.
As for agriculture, the lifeblood of the Indian economy, much leaves to be desired. There have been drumbeats about an unprecedented, five-fold growth in agri budget between FY14 and FY23 from Rs 21,933 crore to Rs 1.38 lakh crore, or 3.4% of total expenditure in FY23.
While agricultural reforms remains a contentious area, the jury is not out on the government's promise of doubling farmers income by 2022. The NSSO surveys on household income come with a lag, but as per the last survey, the average monthly income per agricultural household, from all sources, was estimated at Rs 10,218 in 2019, up from Rs 6,426 in 2013. Which means, farm income increased by 59% till 2019, and a similar growth in the following years would effortlessly fulfil the government's promise. But the last three years have been anything but extraordinary, confirming fears that the 2022 target will be sorely missed.
Moreover, analysts point out that the share of an agricultural household's income from cultivation fell from 48% to 37%, while wages (40%) replaced crop production as the major source of income. It means, even if farmers income indeed doubled, it's not solely on account of agricultural income.
Among all, one aspect where the NDA government scored big includes rural development, providing tap water, electricity and sanitation across the country at an unprecedented scale. Besides, the opening of bank accounts, particularly, in the hinterland helped arrest the leakages in subsidy payouts. What sounded as a playful acronym -- the JAM Trinity -- Jan Dhan Yojana, Aadhaar and mobile numbers -- helped deliver targeted subsidies over time.
While at it, the government decisively reduced its subsidy burden in phases. It was in 2015 that the government first quantified the subsidies for the rich, thanks to Chief Economic Adviser Arvind Subramanian's seminal note on 'Bounties for the well-off.' About Rs 1 lakh crore worth implicit subsidies on cooking gas, power and others benefiting the rich were subsequently scrapped, which in turn helped the government increase its expenditure pie for discretionary spending.