RBI Bulletin Analyzes the Quality of Public Expenditure and its Socio-Economic Impact in India

RBI Bulletin Analyzes the Quality of Public Expenditure and its Socio-Economic Impact in India

This analysis comes in the context of the increased capital expenditure (capex) initiatives by both the Centre and the States. The Reserve Bank of India has developed a Quality of Public Expenditure (QPE) index to empirically assess the relationship between the quality of public spending and socio-economic outcomes.

The QPE Index includes factors such as:

• Capital outlay to GDP ratio
• Revenue expenditure to capital outlay ratio
• Development expenditure to GDP ratio
• Interest payments to total expenditure ratio

Key Findings

The analysis categorizes India’s public expenditure trajectory since 1991 into six distinct phases:

• 1991-95 (Post-Liberalization Phase): Fiscal consolidation occurred at the expense of capital and developmental spending.
• 1996-2003 (Pre-FRBM Years): Rising debt burdens and stagnant public investment.
• 2003-08 (FRBM Implementation): The implementation of rules-based fiscal discipline led to improved capital outlays and reduced interest payments.
• 2008-13 (Global Financial Crisis): Countercyclical measures put fiscal stability under strain but helped in economic recovery.
• 2013-20 (GST & Fiscal Devolution): The introduction of GST and increased fiscal devolution reshaped public expenditure priorities.
• 2020-25 (Pandemic Response): Infrastructure-led recovery supported capital expenditure despite higher borrowing levels.

The analysis highlights that better quality of expenditure correlates with stronger economic performance and better social outcomes.

It also points out that while the Centre’s expenditure quality has a more significant relationship with GDP growth, the quality of expenditure at the State level has a greater impact on the Human Development Index (HDI).

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