India’s Public Expenditure: How the Quality of Government Spending Has Improved

22-02-2025

04:28 AM

1 min read

What’s in Today’s Article?

The RBI has used data since 1991 to create the 'Quality of Public Expenditure' index to assess how well the government is spending its money.

Government expenditure plays a critical role in shaping economic growth, infrastructure, and public welfare.
In India, the Reserve Bank of India (RBI) has developed a Quality of Public Expenditure (QPE) Index to analyse how efficiently both the Centre and states utilize public funds.
The latest RBI report suggests that India's quality of public expenditure is at its highest level since economic liberalization in 1991.
This improvement is attributed to higher capital spending, fiscal discipline, and better allocation of resources.

The Quality of Public Expenditure Index is a framework created by the RBI to measure how effectively government funds are spent.
Instead of just looking at the total expenditure, the index evaluates the composition of spending and its impact on long-term economic growth.
Key Indicators of the QPE Index:
- Capital Outlay to GDP Ratio – Measures the proportion of government spending on infrastructure and development projects relative to GDP. A higher ratio indicates better quality expenditure.
- Revenue Expenditure to Capital Outlay Ratio – Assesses the balance between day-to-day operational expenses and long-term investment. A lower ratio is preferred, as excessive revenue expenditure weakens fiscal sustainability.
- Development Expenditure to GDP Ratio – Tracks public spending in healthcare, education, research, infrastructure, and social welfare. Higher investment in these sectors improves human capital and economic productivity.
- Development Expenditure as a Percentage of Total Expenditure – Evaluates the share of productive investments in overall government spending. The higher the proportion, the better.
- Interest Payments to Total Government Expenditure Ratio – Reflects the burden of government debt. A lower percentage indicates better fiscal management and reduced reliance on borrowed funds.

Shift Toward Capital Expenditure
- Over the past two decades, India has prioritized capital investment over revenue expenditure.
- Unlike routine administrative costs, capital expenditure funds infrastructure, roads, energy, and digital connectivity, boosting long-term economic growth.
Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act
- To control government borrowing, India introduced the FRBM Act in 2003, limiting the fiscal deficit to 3% of GDP.
- This move ensured that borrowing was primarily used for capital projects rather than operational expenses.
Managing Fiscal Deficit and Debt Levels
- Instead of focusing solely on the annual fiscal deficit, India has shifted towards managing overall debt levels as a percentage of GDP. This approach helps maintain long-term fiscal sustainability while allowing flexibility in economic crises.
Rising Development Expenditure
- The government has increased investment in education, healthcare, and social programs, improving human capital development and economic productivity.
Reduction in Interest Payment Burden
- With better debt management and controlled borrowing, India has reduced its interest payment burden, ensuring more funds are allocated to productive sectors.

Despite these improvements, some challenges remain:
- Crisis-Driven Fiscal Stimulus – Events like the 2008 Global Financial Crisis and COVID-19 lockdowns forced the government to increase spending beyond fiscal limits, impacting expenditure quality.
- Political Pressures for Loan Waivers and Freebies – Increasing populist measures like loan waivers, direct cash transfers, and free electricity schemes put pressure on government finances.
- Balancing Revenue and Capital Expenditure – While capital investment has grown, revenue expenditure on salaries, subsidies, and interest payments remains high, reducing fiscal flexibility.

Sustaining Capital Expenditure Growth – Continued investment in infrastructure, renewable energy, and digital transformation.
Balancing Welfare and Development Spending – Ensuring social schemes do not outweigh productive investments.
Enhancing Fiscal Federalism – Strengthening Centre-state financial coordination for balanced economic development.
Maintaining Fiscal Discipline – Keeping borrowing under control while ensuring growth-oriented public spending.
Strengthening Transparency and Monitoring – Using data-driven governance models to track expenditure efficiency.

India has made significant progress in improving the quality of public expenditure, with the RBI’s QPE Index showing its best performance since 1991.
A focus on capital investment, fiscal discipline, and effective debt management has enhanced economic growth and public welfare.
However, political populism and fiscal pressures remain key challenges.
To sustain these gains, policy continuity, efficient resource allocation, and financial discipline will be crucial in the years ahead.

Q1. What is the Quality of Public Expenditure (QPE) Index?

Ans. The QPE Index is an RBI-developed tool to assess the effectiveness of government spending in India.

Q2. What are the key factors considered in the QPE Index?

Ans. It evaluates capital investment, development expenditure, revenue-to-capital ratio, and interest payment burden.

Q3. How has India improved the quality of public expenditure?

Ans. India has increased capital spending, controlled fiscal deficits, and focused on infrastructure and social development.

Q4. What challenges impact public expenditure quality in India?

Ans. Crisis-driven spending, political populism, and high revenue expenditure affect fiscal sustainability.

Q5. What is the role of the FRBM Act in improving expenditure quality?

Ans. The FRBM Act limits fiscal deficit and encourages borrowing for development, ensuring better financial discipline.

Source: IE