Government Investment vs Government Expenditure

(Contributed by Mikky)

Back in 2011, during my amateur-eyed, junior year of post graduation in Economics, I had attended a seminar in my department on certain issues of inclusive development. One of the delegates from the Madras Institute of Development who had been instrumental in promoting cash crop cultivation among the tribals in the Araku Valley region in South Eastern India raised a point regarding the subsidy programmes the government resolutes itself into provision. I was enthralled at the humanism of his query. He said ” How wonderful would it be if those 100 rupees the Govt. spent on land giving subsidies were actually the 100 rupees invested into the same piece of land.” The harshness of life in poor hamlets and how this economist proposed a change had taken me to be a democratic socialist for about a year.

English: Araku-valley
Araku-valley (Photo credit: Wikipedia)

    If you are following our blog for sometime now, you would’ve known that India just had its budget sessions. Any avid reader in my country has gone through a rough analysis of it. I went through a thorough reading of the whole document, the speech etc, and I made some analysis out of the budget from a certain angle, but what disturbed me was that it was everything about expenditure and subsidization and I was a Schumpeterian . This aspect of the general budgeting takes us back to the question,

“Should it be an expenditure budget or an investment budget as unfailingly the multiplier effect of investment is greater than expenditure.”

    After a  general discussion with the professors, I got an answer.  The government’s budget is a necessitated expenditure budget.  It is not the aim as perceived by people that expenditures can be pocketed by the hierarchy and as I said above, it is a “necessitated expenditure budget”.

Agriculture
Agriculture (Photo credit: thegreenpages)
THE SCENARIO
The primary sector ( in the developing countries)  is a dichotomised setting of social and economic barriers. The duality exists with the landowners, who own large chunks of land, and with the small farmers and agricultural labourers. The agricultural labourers get employed or tenant the holdings of larger farmers to whom they pay sizable production as rent. This makes the agricultural labourers who are uneducated and hazy in their perception, the bottom of the structure.
      Any function of a democratic government is to look after the well being of the general public who vote them to power. So while budgeting the authorities have two options, either to invest or expend. This is where I was stuck with my thought.

WHAT HAPPENS IF THE GOVERNMENT INVESTS RATHER THAN EXPENDS

Investment happens through established channels. The banks: agro-banks, co-operative banks etc are the preferred intermediaries of fund channelisation. The small farmers basically lack an access to such institutions due to the lack of education and thus the resultant doubt in societal and financial conduct.  The research or infrastructure that the govt. so invests to facilitate production hardly reaches the bottom large of the agricultural workforce. Hence the government which thinks of the greatest good to the greatest number of people will have a defunct policy in effect if they chose to invest in hope of reaching the small farmers (which constitutes a large section of the population in an agrarian economy).
Budget
Budget (Photo credit: Tax Credits)

Expenditures that Govt. undertakes are nothing but subsidies in provision. The public distribution system (PDS) that provides the basic necessities to the public is largely influenced by the subsidies the Govt. provides. Same goes with the subsidies in seeds, fertilizer, loans and other miscellany the policy makers provide, which is what the union budget aims for. Funds of this kind percolates to the base level farmers who look up for help from the public sector. When the small farmer gains access to what he needs in concrete, the goodness of the expenditure is well justified.

The existence of a ‘have and have not’ in one single sector and such inequalities levelled is the sole purpose of budgeting through expanding the production life of the assets. The method of financing through investment goes kaput due to the presence of larger hands against smaller hands but funding through incurring expenditure can seep through any larger hand to reach the small hand, those hands that are numerous and the hands in need.
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©The Idea Bucket, 2013
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5 Comments

  1. You present a good question with should it be an expenditure or investment budget. I think that your question can be used as a Model for separating the items in a budget that can be one or the other. How can a government budget be either one or the other? When it is all expenditure nothing but debt arises, when it’s all investment people in need of services will be left to suffer. A combination of both would make the most sense (well at least to me … 🙂 Great post

  2. I like the idea of ‘government investment’ over ‘government expenditure’ – of cash flows going through intermediaries than mere subsidies.

    It is slightly of the same predicament as privatization, as it can not be avoided that all intermediaries to which funds are passed on are government-owned.

  3. Informative, but more like an black and white distinction. Even NGOs execute projects with clear, defined outputs, for monitoring and evluation purposes. Then, there indeed are parts of the budget that can framed and specified in investment terms. The devil lies in details and the governemnt is certainly short, woefully short on mindfulness, sense of responsibility and accountable system. The successive CAG reports pare just the tip of that aspect !

  4. I live in the USA and here we have social economic battles all the time in regards to what consitutes a ” hand out” vs a “Helping hand” up. Our governement subisidizes many forms of business in our society from agriculture, education, health care, food programs,to the Arts…A large part of our society likes to see the goverment (Federal govt mainly) act in a limited role with a lot of social issues…in regards to “their” tax money being spent on them. I think the biggest misperception with this in regards to certain types of subisidies is that they are seen by the opponents to such legislation as being just a “hand out” type approach to “investing” in that person or companies future with no real substance to the investment other than to keep them alive and keeping them going. We have a social/politcal caste system (behind closed doors) that sees certain parts of our society as unworthy of development at the heart of it is my belief. Hence you see no real effecive targeted investment or expenditures budgeted that do any real good…such as better education, better health care system, demands for better equality in the workplace,..its sort of status quo mentality here in America…dont rock th boat please beacause my family is doing just fine…to me it all comes down to apathy. They’re are a few bright leaders trying to sway a majority and we are making slow baby steps towards hopefully a better a more compassionate consensus in our lack of seeing ourselves as part of a bigger picture in this world than self made island we like to create for ourselves. Not sure where I was going with my statement. I just wanted to say expenditures and investmnents go hand in hand with any economy and essentially can be thought of as one in the same if both are utlized correctly.

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