In modern times, the concept of quantum of public expenditure has become passé and smart public spending is the buzzword in economies across the world. Vitor Gaspar, director of the IMF’s fiscal affairs
department, quoted in Wall Street Next, said discretionary spending could boost economic growth even without raising overall spending limits.
Smart spending means allocating existing spending in a better way to improve the “technical efficiency of spending” which is the maximum output that can be achieved at a given level of public spending. Today countries are moving the goalposts as their emphasis is on the quality of expenditure rather than the quantity of public spending.
A recent study by the IMF, which examined 174 economies, shows that governments can get, on average, a third more value from their spending by adopting smart spending best practices.
The report said smart spending and better allocation of existing resources would boost output by up to 11 per cent in emerging markets and developing economies and up to 4 per cent in advanced economies over the long term. It is believed that smart spending can achieve faster growth, less fiscal pressure and greater social equality without increasing the fiscal burden.
The IMF’s October 2025 Smart Spending report emphasises that redirecting public spending to infrastructure, education, health, and research and development can achieve output gains without increasing overall spending. Apart from this, increasing innovation and research funding from the current inadequate level of 0.7 per cent of GDP to 1.5-2 per cent could boost advances in AI, semiconductors, and green technology.
Investments in education, skills development and healthcare can enhance human capital, boosting long-term productivity and innovation. According to the IMF Fiscal Monitor (April 2024), reallocating just 1 per cent of GDP from government consumption to productive investment can boost long-term output by 1.5-3.5 per cent, and when combined with efficiency gains, the overall growth impact is even larger.
The Case for Spending Smarter
In the Indian context, public expenditure is comparable to peer economies. According to the IMF’s World Economic Outlook, cited in The Print, Indian government spending at the all-India level is about 28 per cent of GDP. This is higher than many economies in Southeast Asia and sub-Saharan Africa. Its expenditure relative to GDP is much higher than that of South Asian neighbours such as Sri Lanka and Bangladesh.
Understanding the importance of smart spending, India’s next goal should be to maximise the impact of every rupee spent by spending smartly. India could benefit significantly from shifting 1 per cent of GDP from discretionary spending such as administrative overhead or non-targeted subsidies to non-discretionary spending such as infrastructure, innovation and human capital.
Smart capital expenditure, especially in roads, railways, ports, digital infrastructure and renewable energy, has been beneficial in terms of job creation, logistics efficiency and has strengthened India’s competitiveness.
This has also boosted private investment in allied industries such as cement, steel, construction and logistics. Indian companies in the cement manufacturing sector are planning to invest around Rs 1.25 trillion to add 130 million tons of grinding capacity between FY2025 and FY2027.
On the other hand, private companies like JSW Steel and ArcelorMittal Nippon Steel are set to invest billions of dollars in capacity expansion and/or new integrated plants in Maharashtra, Odisha and Andhra Pradesh.
In 2024, nearly half of the country’s annual construction expenditure was financed by the private players. India’s innovative financing instruments like InvITs and ESG-linked financing are attracting more private funds to the construction sector.
India has undergone remarkable transformation over the past three-and-a-half decades, lifting millions out of poverty, expanding access to education and achieving near-universal mobile connectivity. The country has made great strides in infrastructure development, financial inclusion through the Jan Dhan Yojana, and digital public infrastructure through Aadhaar and UPI.
The next wave of growth will depend not only on how much the government spends, but also on how efficiently it spends to become a $10 trillion economy by 2047. Efficient fiscal management, smart allocation of public funds, and investments in sectors ranging from strategic defence to semiconductors, clean energy to agriculture, and digital sovereignty to youth empowerment can enable faster, more inclusive, and more sustainable growth.
Effective Public Expenditure
India has decided to jump on the bandwagon and has taken strong steps towards maintaining efficiency in public expenditure. It introduced measures like Public Financial Management System (PFMS), Direct Benefit Transfer (DBT) and Government e-Marketplace (GeM) to plug leakages, enhance transparency and ensure value for money.
Nevertheless, significant gaps remain in the efficiency of infrastructure, social welfare, and improved education programs, however, further efficiency gains can be achieved. To this end, the government can create outcome-based budgets that link future allocations to measurable outcomes.
The result-oriented budget system and digital dashboard platforms for project tracking like PRAGATI—used to review and monitor government projects and address public grievances—have enhanced project monitoring and reduced delays. This can reduce time and cost overruns. Following this, independent expenditure reviews can be conducted to identify overlaps, inefficiencies and underperforming programs.
Powering Growth, Building the Future
The last few Union Budgets have seen a significant increase in government capital expenditure, as it strengthens infrastructure, generates demand, attracts private investment and boosts growth. India’s capital expenditure, which was Rs 3.36 trillion in FY20, has grown 3.03 times in just five years to reach Rs 10.19 trillion in FY25 and will reach Rs 11.21 trillion by FY26.
India’s capital expenditure has been steadily rising and this figure reflects the government’s approach towards public expenditure to maintain the growth momentum. Moreover, if we look at the share of capital expenditure in total expenditure during the same period, it has grown from 12.5 per cent to about 21.6 per cent. In relative terms, the capital expenditure-GDP ratio has nearly doubled from 1.65 per cent in FY2020 to 3.14 per cent in FY2025, reflecting a clear policy focus on asset creation and long-term productivity.
Since capital expenditure always has a multiplier effect, the sharp increase in capital expenditure in public investment has had a tangible impact on the economy. According to studies by the Reserve Bank of India and the National Institute of Public Finance and Policy, cited on the Niti Aayog website, the multiplier effect of capital expenditure in India is 2.5-3 times.
This means that every one rupee spent on infrastructure generates approximately three rupees of economic output over time. A working paper by NIPFP states that the multiplier effect of capital expenditure is about 2.45 and the cumulative multiplier over 7 years is 4.8.
Balancing Growth with Fiscal Prudence
In recent times, while India has significantly increased capital expenditure, it has also rapidly embarked on the path of fiscal consolidation. It is striking a balance between capital expenditure for growth and fiscal consolidation. The fiscal deficit ranged between 3.5-4.6 per cent during FY 2017 to FY2020, which suddenly trapped in a fiscal doom loop as it reached to 9.2 per cent of GDP in FY 2021 due to the adverse impact of the global Covid-19 pandemic.
However, due to the balanced fiscal consolidation path, it declined to 4.8 per cent in FY2025, and is projected to decline to 4.4 per cent in FY2026, lower than the medium-term target of 4.5 per cent. It is on the glide path announced for fiscal consolidation in Budget 2021-22. From 2026-27, instead of fixing a fiscal deficit number in terms of GDP, the government will strive to maintain the fiscal deficit in such a way that the central government debt as a percentage of GDP continues to decline.
The government’s adherence to the path of fiscal consolidation has strengthened macroeconomic stability, reduced borrowing costs, boosted investor confidence and boosted growth. The buoyancy in GST and direct taxes has prompted the government to undertake more productive spending without a sharp increase in debt. India has offered a valuable lesson to emerging economies by striking a balance between growth-oriented capital expenditure and sound fiscal management.
Dealing with Rigidity and Fiscal Constraints
Like other countries, a large portion of expenditure in India is spent on committed expenditure such as salaries, pensions and interest payments, often leaving limited fiscal space for developmental expenditure.
IMF Assistant Director Era Dubla-Norris said excessive rigidity may be skating on thin ice as it could block necessary reforms, so she highlighted the need for flexibility in the budget structure. Therefore, fiscal space must be created for growth and this can be done through subsidy reforms and result-based transfers to states.
The government can improve fiscal flexibility while maintaining service delivery through reforms in public sector salaries and pensions, rationalising centrally sponsored schemes and greater transfers of untied funds.
Countries such as Estonia and Sweden have demonstrated how medium-term expenditure frameworks can provide flexibility while maintaining fiscal prudence. India is also on the same page as its own Fiscal Responsibility and Budget Management (FRBM) framework could evolve to incorporate efficiency and performance indicators alongside deficit targets.
The Way Forward
In a nutshell, India’s robust growth—averaging over 7 per cent in recent years—is a testament to the effectiveness of its investment-led growth model. But maintaining this momentum will require a greater focus on spending efficiency. India can achieve the next level of productivity gains by spending more efficiently on infrastructure, education, innovation and health, redistributing public resources and ensuring that every rupee is spent effectively.
The smart spending experience of countries like Rwanda and Canada shows that fiscal prudence and efficiency are not obstacles to growth, but rather mean achieving better results with the same resources. Spending smartly for India is not just about good economics; it is about good governance.
As India moves from a developing to a developed economy, efficient public expenditure will have to be the cornerstone of its fiscal and development strategy. This is because, in the words of the IMF’s recent Fiscal Monitor, “spending smarter is more than a fiscal tactic—it is a development strategy”. This strategy could be the key for India to achieve its vision of Viksit Bharat by 2047.
(The author teaches finance at Institute of Technology and Science, Ghaziabad, and tweets @meetdrvinay. Views expressed are personal and solely those of the author. They do not necessarily reflect News18’s views.)
