India’s Public Spending Boom Rings Hollow: Myth of the Multiplier

For years, Indian economists droned the same refrain — too much revenue expenditure, not enough capital expenditure. The government, they said, must stop spending on salaries and start building roads. It’s the fiscal equivalent of being told to eat more protein and less dessert.

Under Narendra Modi, the state has gone on a construction binge worthy of the Mughal emperors — ₹54 trillion poured into capital expenditure in just eleven years. In the last three alone, we’ve spent over ₹11 trillion annually. Roads, railways, defence, water projects — you name it. The bulldozers haven’t rested since.

So, naturally, one would expect an economic dawn — faster movement of goods, lower logistics costs, more jobs, happier people. A Keynesian dream, in other words: the government spends, demand rises, and the private sector jumps in, inspired and eager.

Only, it hasn’t. The animal spirit is not just asleep; it seems comatose.

Private capital expenditure — the ultimate litmus test of investor confidence — has barely stirred. Private participation in gross fixed capital formation has slid to 34.4% in FY24, down from over 40% before 2016. Meanwhile, government capex as a share of GDP has risen from 2.8% pre-pandemic to over 4.1%. The contrast tells its own story: the government is sprinting, while private capital is watching from the pavilion.

It’s not as if Modi hasn’t tried. He has tried everything.
First came the banking clean-up. Remember the sermon? “We must fix the sins of the UPA years.” So bad loans were written off, banks were recapitalised, and a new bankruptcy code was born. But, as usual, nobody was punished. The message to India’s business class was simple: sin boldly, and the taxpayer will play priest.

Then came Act Two — the 2019 corporate tax cuts. In one dramatic stroke, rates were slashed from 30% to 22%, among the steepest tax holidays in emerging markets. The idea was classic supply-side economics: fatten corporate profits, and reinvestment will follow. Instead, much of the bounty found its way into balance-sheet repair and stock buybacks. India’s private sector acted less like a hungry tiger and more like a cat grooming itself in the sun.

When that failed, came the shiny new toy — the Production-Linked Incentive (PLI) scheme. A buffet of subsidies to attract manufacturers. “Make in India,” they said. But instead of factories of innovation, we got screwdriver shops assembling foreign parts. A screwdriver economy masquerading as industrial revolution.

Finally, post-pandemic, came the grand finale — government-led capex as the economy’s locomotive. With tax cuts, recapitalised banks, and PLI carrots all failing to move the needle, the state decided to do the heavy lifting itself. Roads, bridges, ports — the works. India’s budget became a civil engineer’s dream and an economist’s blind spot.

And to justify it all, our economists quote Keynes.
But if Keynes could return from the dead, he might quote Nehru instead.

In 1958, Nehru warned against “the disease of gigantism” — that obsession with massive projects to prove we can build them. He said, “It is the small industries, the small irrigation projects, that will change the face of India.”

Prophetic words, from a man accused of exactly that disease. Every large project brings its own fever — displacement, corruption, delay, and a quiet burial of accountability.

The Modi era has resurrected gigantism with evangelical zeal. Expressways are christened as symbols of national pride, airports as modern temples. Yet, as economist Rathin Roy has argued, India’s capex surge has created “growth without jobs” — steel and concrete without consumption or confidence. The rich get infrastructure; the poor get the bill.

In theory, government capex should crowd in private investment by lowering transaction costs and improving logistics. In practice, it’s crowding it out. The state’s fiscal appetite pushes up interest rates, leaving less room for private credit.

And who benefits? The usual suspects — big contractors, politically connected conglomerates, and state-backed firms. They thrive not on innovation but on proximity. India’s Economic Survey once warned of “a government-dominated investment cycle.” That warning was drowned out by applause at ribbon-cutting ceremonies.

Let’s call it what it is — corruption by construction.
Behind every expressway and dam lies a familiar story of tenders written for friends, bills inflated beyond belief, and audits quietly ignored. Ramachandra Guha once wrote that every big dam in India is a monument not just to modernity but to corruption. Nothing has changed — only the concrete has become shinier.

India’s story today is not of lack of ambition but of misplaced faith — a belief that government-led spending can replace private enterprise. It cannot. China’s investment miracle worked not because of endless state spending but because of relentless private reinvestment. The U.S. New Deal, for all its public works, ultimately succeeded because it restored confidence in the private economy.

Modi’s fiscal adventure — from tax cuts to PLI schemes to this ceaseless infrastructure orgy — has produced headlines, not hope. The money doesn’t trickle down; it seeps out. What India has perfected is not “ease of doing business,” but ease of siphoning funds.

 Don't just read, engage! Leave a comment and hit that subscribe button. 

https://www.moneylife.in/article/the-elusive-private-capex-boom/78507.html

https://ramachandraguha.in/archives/prime-ministers-and-big-dams.html