26-February-2025-Editorial

QUALITY OF PUBLIC EXPENDITURE (QPE) INDEX

The Reserve Bank of India (RBI) has introduced the Quality of Public Expenditure (QPE) Index to evaluate how effectively the central and state governments allocate financial resources. This index helps in understanding whether government spending contributes to long-term economic growth and development rather than just focusing on the total amount spent.

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

• The QPE Index assesses the efficiency of public spending by analyzing its composition and impact.
• It shifts the focus from the total amount of spending to how funds are allocated towards productive and developmental activities.

Key Indicators of the QPE Index

The index is based on five key indicators:

1. Capital Outlay to GDP Ratio
   • Measures the proportion of GDP spent on infrastructure (roads, power, railways, etc.).
   • A higher ratio suggests better quality of spending.
2. Revenue Expenditure to Capital Outlay Ratio
   • Compares spending on salaries, pensions, and subsidies against asset creation and infrastructure.
   • A lower ratio implies a better allocation towards productive investments.
3. Development Expenditure to GDP Ratio
   • Represents government spending on education, healthcare, research, and infrastructure.
   • A higher ratio indicates improved economic productivity.
4. Development Expenditure as a Share of Total Government Spending
   • Indicates the percentage of the total budget used for developmental sectors.
   • A higher share reflects a focus on long-term economic benefits.
5. Interest Payments to Total Expenditure Ratio
   • Assesses the financial burden of past borrowings on government spending.
   • A lower ratio signifies better fiscal health and more funds for development.

Key Findings of the QPE Index

The RBI has divided India’s public expenditure trends since 1991 into six phases:

1. 1991–1997:
   • Early economic liberalization saw some improvement in expenditure quality.
   • States faced fiscal pressures, leading to reduced public investment.
2. 1997–2003:
   • Expenditure quality declined due to the Fifth Pay Commission, rising interest payments, and excessive revenue spending.
3. 2003–2008:
   • The implementation of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 improved financial discipline.
   • States benefited from increased tax devolution.
   • The 2008 Global Financial Crisis (GFC) temporarily halted progress.
4. 2008–2013:
   • Initial stimulus spending improved expenditure quality.
   • Later, fiscal imbalances emerged, reducing efficiency.
5. 2013–2019:
   • States improved spending efficiency with higher development allocations.
   • The 14th Finance Commission played a role in better fund distribution.
   • The Centre faced challenges due to the initial impact of the Goods and Services Tax (GST) revenue sharing.
6. 2019–2025:
   • The COVID-19 pandemic led to a temporary decline in expenditure quality.
   • Post-pandemic, higher capital expenditure improved spending efficiency.
   • As of 2024-25, India’s QPE is at its highest level since the 1991 economic liberalization, reflecting improved financial management.

About Public Expenditure

Public Expenditure (PE) refers to government spending on services like healthcare, education, infrastructure, and welfare programs.

• Objectives:

• Ensures efficient resource allocation.
• Helps in income redistribution.
• Maintains economic stability by managing inflation and employment.
• Supports long-term development through investments in infrastructure and technology.

Classification of Public Expenditure

1. Revenue Expenditure:
   • Includes salaries, pensions, and subsidies.
   • Often recurring in nature, not contributing to asset creation.
2. Capital Expenditure:
   • Involves investments in long-term assets like infrastructure and public projects.
   • Higher capital expenditure enhances the quality of public spending, leading to sustained economic growth.

Recent Public Expenditure Trends

• According to the Economic Survey 2024-25:

• Government capital expenditure increased by 8.2% year-over-year (YoY).
• State revenue expenditure grew by 12% YoY.

• The Union Budget 2025-26 allocated ₹11.21 lakh crore for capital expenditure, constituting 3.1% of GDP for FY 2025-26.

Challenges in Public Expenditure

• Excessive revenue spending: High expenditure on salaries, pensions, and subsidies can reduce financial sustainability.
• Rising fiscal deficits:

• Persistent deficits and increased borrowing burden the economy.
• Limits government’s ability to invest in development projects.

• Investor confidence:

• High revenue expenditure weakens market confidence in government financial management.
• Affects overall economic stability.

Way Forward

1. Zero-Based Budgeting (ZBB) and Performance-Based Budgeting:
   • Ensures efficient allocation of funds.
   • Avoids unnecessary expenditures.
2. Focus on High-Impact Sectors:
   • Prioritize investments in healthcare, education, and infrastructure for long-term benefits.
3. Decentralized Fund Allocation:
   • Increase devolution to states and local governments.
   • Ensures a more need-based approach while maintaining fiscal discipline.
4. Promoting Self-Sustaining Projects:
   • Reduce deficit financing by encouraging domestic and foreign investment.
5. Expanding Direct Benefit Transfers (DBTs):
   • Use Jan Dhan-Aadhar-Mobile (JAM) Trinity to ensure targeted delivery of subsidies.
   • Reduces leakages and corruption in revenue expenditure.

Conclusion

The QPE Index serves as a crucial tool for evaluating the effectiveness of government spending. While India has improved in public expenditure quality, challenges remain in ensuring optimal fund allocation. A balanced approach focusing on capital investment, fiscal discipline, and efficient resource distribution can lead to sustained economic growth and development.