Utility of public spending must be conveyed

Government is the most ‘watched’ economic institution in India. It stirs curiosity, admiration, hope and respect. It triggers an equal amount of suspicion, distrust, criticism and rejection.

The decision by the Telangana government to pull down the old secretariat buildings in Hyderabad has drawn criticism. The plan to replace the old with the new has drawn fierce condemnation. How could the Telangana government do this when coronavirus is raging? People need oxygen, testing, beds and ventilators. The proposed spending on the new secretariat buildings is a ‘criminal waste’.

It is common in India for commoners to assess the social utility of public spending. Commoners watch every step of government. The Telangana government and the chief minister have made a big mistake. The mistake does not lie in the plan to demolish the old secretariat buildings, and in the proposal to build anew a modern set of buildings to replace the old. The mistake essentially lies in the communication of the underlying facts, activities and benefits. What are the benefits and to whom will they accrue?

The Telangana government’s plan is the most recent in a long line of reviled public spending projects. The proposal of the Union government to build a new parliamentary complex has received flak. Let us add the Statue of Unity that was erected in 2018. . Let us also add the statues of Mayawati, a former chief minister of Uttar Pradesh — India’s most populous State. Its households are not as prosperous as the households in the other States.

The Statue of Unity and the statues to Mayawati were described as egregious examples of wasteful spending by the governments of Gujarat and Uttar Pradesh. How can we afford such wasteful spending when there is so much poverty around us?

Celebrating the engagement

The criticism and the rejection of such spending by government are both explicable and desirable. Over 94 per cent of India’s working population is in the unorganised sector. That percentage is enormous. Farmers, traders, shopkeepers, crafts people and the self-employed constitute the unorganised sector. They are not affiliated to banks, companies, police, the armed forces and departments of government. Government is the only economic institution most individuals know. It is natural for them to evaluate government spending the same way they evaluate spending within their households. Waste is loathed. Parsimony is appreciated and respected.

Most citizens in the unorganised sector do not have colleagues. They regard the chief ministers and the prime minister as their equals, rivals, allies and tormentors. So the general principles of the locker room apply to the analyses of actions, decisions and plans of government. . Households have an income-statement view of the world. They work with a one-period, cash-income model. The idea of wealth is too distant because wealth is rare. There is nothing called a balance sheet. A bank account with a few thousand rupees in it is not a balance sheet. There are other assets. These are necessities that may not find a buyer in an emergency. So, households are very careful about what they spend their money on.

Households are engaged in a battle for survival. They have to compare spending on consumption with spending on the so-called assets such as a bicycle, a gas stove, a sewing machine and a mobile handset. Income statement expenses are compared with balance sheet expenditures. Everything is spending. Punctilious parsimony is applied to spending.

Government has both an income statement and a balance sheet. The budgetary outlays on bullet trains, statues, and secretariat complexes are necessary. But they are massive in the eyes and minds of commoners who postpone spending ₹50 on a pav bhaji so that they can replace the battery in their handset some day. They are aghast when government announces big spending. What a criminal waste!

Government needs to explain. Let us track the flow. Government has cash in its balance sheet. It is a debit-side entry. It spends. When it spends cash, there are four resultant outcomes. First, cash becomes a long-term asset. Second, there is a debit-side expense. The third and the fourth entries are exciting. They happen outside government. Third, cash reappears on the debit side of households and businesses. Most massive government projects involve payment of wages. They involve buying inputs that have high wage content. These enhance the spending power of society.

Fourth, it is an income on the credit side. This could earn some sizeable taxes to government. The spending multiplier of these will support further spending on oxygen, Covid-19 testing, beds and ventilators. These events and entries pertain to the year(s) in which the government spending occurs. There is more thereafter, year after year. Cash will keep appearing at the households and businesses. Bullet trains, statues, and secretariat complexes require maintenance. They generate incomes. There would be users and visitors. They generate incomes. The one-period, cash-income world then becomes a multi-period, cash-income world. The static principles of parsimony break down.

The writer is founder of CreaSakti

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