India’s Government Is Big, And Bulging. Governance Suffers

State spending has been widely touted as the magic bullet to growth. However a keener look at our governments’ impact-spend ratio reveals a dismal picture.

Government spends generously. However, seen in the larger context of impact vs spend, often extravagantly, even recklessly. Spending is scattershot i.e. random and indiscriminate. Implementation is lazy and indifferent. 

Government is too big. Bulging & gaining weight

State ‘enjoys’ extensive & disproportional power, wields too much discretionary, often capricious influence. It commands vast resources and spends arbitrarily, even erratically. It is bad economics.

Big governments’ spending in value depreciating activities across inefficient frameworks is inevitably wasteful, diminishes impact and value eroding. The sums are staggering. Every fourth rupee spent is wasted. 

Look around. Agony is visible and evident.

What is inescapable to even the untrained eye is the profligacy, the unnecessary proliferation of government offices, bloating ranks of government servants. One can’t miss the 400 million deprived and ‘waiting’. Inequality is on the rise and biting. Jobs are scarce. Many employed; are under-employment. Farmers earn less than the much exploited migrant labour, and distressed. 

India’s government spending/GDP ratio compares favourably with economies of its size and ilk. However, concern is how & where it spends; particularly who spends it and to what impact? 

Governments access funds, much too easily. 

Extraction, displacement and slumping costs

The extraction cost i.e. unfairly taxing income, investment, saving and other forms of productive behaviour has adverse consequences. Policymakers are innovative, and stealthily surcharge taxpayers. Some ‘coax & nudge’. High indirect & direct taxes reduce spending power of individuals, lowering consumption. Equally, drains resources from the efficient private sector, discouraging investment. 

Consumption and investment are key growth drivers. 

Similarly the displacement cost i.e. misallocating resources to the inefficient from the productive’ sector debases productivity. Slumping cost i.e. government spending model is inherently inflexible, centralised and obsolete against private sector’s ‘creative’ destruction model that  constantly seeks opportunities and options to enhance outcome. 

Many don’t appreciate the intangible cost of poor governance as a result of big government. Inefficiency slows administration, delays decision making. Files meander unless the ‘interested’ take ownership. Big government invariably deflects resources & attention, and curtails primary responsibility of governance, manifesting into several other ills.

Work ethics & culture deteriorate. 

When other governments take up a third of the GNP, they provide admirable & efficient public services, and robust & sustainable social security. Our ‘development’ spending is less than a third; the rest is spent on non-merit subsidies, loan repayment, salaries and inefficient public good & services. 

Always at odds, rarely even 

Most budgets go to ‘big’ government, and increasing. A Crux study across 200 policy watchers and key stakeholders highlights government spending has been increasing at a higher rate than GDP. Data of 25 years highlights a disturbing trend i.e. persistent and negative correlation between GDP growth and the level (expansion) of government spending, worsening when the government is ‘already’ very large. A 10% increase in state expenditures reduces GDP growth by 1.5%.

Societal impact lags much more. 

No one grudges spending on hard ‘social capital’, like economic linkage & connectedness between urban-rural livelihoods, or ‘bridges’ coupling haves & poor. Enabling MSME & agri ecosystems are long-term multipliers. Similarly the soft infrastructure spending in health, education, and social security are assets of intrinsic value and economic multipliers. 

State must adopt value-appreciating, impacting models, which owns, but outsources service & delivery; not profit. It improves delivery, reduces cost. 

While there is no denying that government programs provide valuable ‘public goods’ equally undeniable is that the government does this badly. Crux Study articulates the economy could gallop if the ‘burden’ of spending was shouldered by the private sector, and citizens could decide what to consume, determine where to invest.

Easy solution; not necessarily ideal 

Grand plans make ‘dream’ budgets. Bureaucrats are indifferent, some inept. Election seeking representatives focus on quick-fixes, push for the ‘visible’. Hospitals over health, sprawling university campuses over learning, eight lane highways over city roads, bullet trains over railway expansions etc.

These are only a few misplaced priorities. There are several more. 

Metro and highways are rarely used by the poor. Our cities are a story of neglect and indifference. Investment in prevention focussed healthcare, and skill pivoted education which fuses ‘learning with doing’ can create a pool of educated doers, obliterating short termism like skill development. Loan waivers are political; shifting the distress to the other door. Similarly farm subsidy benefits only the rich & influential. 

Crux study articulates, a farmer focussed, holistic agri- policies, with rural development as the core would eradicate farm distress; inject growth drivers to the rural economy.

The study concludes, downsizing government will increase GDP, enhance competitiveness. Cost of poor governance, indifferent policymaking, archaic frameworks and ineffective implementation is chronic. 

People pay.

Widespread economic distortion

When JM Keynes advocated "pump priming" i.e. government spending boosts growth by ‘injecting purchase’ he meant holistic, efficient not frivolous, irresponsible injecting. 

While government spending model diminishes impact, there are several other key variables that are the determinant of the big government.  The nature, character and behaviour of big government invariably dominate economic forces in resource allocation, imposing huge costs; hurting the economy's productive sector. 

The model is broken. 

Red tape shaves impact. Tax, trade, and monetary policies play a role too. Similarly, subsidy costs are economically undesirable, encourage destructive choices, undesirable behaviour. 

Good governance key

In a global economic setting where both capital and jobs migrate, the reward for good governance is greater than ever before. Penalty is equally severe.

India is heading in the wrong direction.

This generation and the ‘aspiring’ next would not want another lost century. To his credit the PM has tried, even succeeded in reducing the motivation of the bureaucracy to ‘influence’ policymaking, and ‘impact’ implementation. 

And yet the government is bulging. Government spending should be reduced significantly and impact centred. 

Downsizing the government must be a priority. Similarly ‘more governance less government’, should be the key agenda for the Prime Minister.