Smart spending, smart growth: Harnessing public expenditure for India’s future

In today’s world, the focus has shifted from how much governments spend to how wisely they spend. Smart public spending means using every rupee efficiently to get the maximum output without necessarily increasing the total budget. According to the IMF, reallocating funds effectively can boost economic output by up to 11% in emerging economies and 4% in advanced ones. Smart spending can also reduce fiscal pressure, improve equality, and speed up growth without increasing the government’s overall expenditure.

The key to smart spending is technical efficiency—making sure existing funds are used in the best way. This involves redirecting money to areas that create long-term value, such as infrastructure, education, healthcare, and research and development. Currently, India spends only 0.7% of its GDP on research and innovation. Increasing this to 1.5-2% could accelerate progress in AI, green technology, and semiconductors, positioning India as a global leader in advanced industries.

Education, skills development, and healthcare are equally critical. Improving these sectors boosts human capital, making the workforce more productive and innovative. Even shifting just 1% of GDP from non-productive spending to investment in these areas can increase long-term output by 1.5-3.5%. Combined with efficiency gains, the impact on growth is even greater.

India’s public expenditure as a share of GDP is around 28%, higher than many Southeast Asian and South Asian countries. This shows that India has resources but needs to allocate them better. By shifting funds from administrative overhead or untargeted subsidies to productive areas like infrastructure, innovation, and skill development, India can achieve faster and more inclusive growth.

Investing in capital projects—roads, railways, ports, digital networks, and renewable energy—has multiple benefits. It creates jobs, improves logistics, and strengthens competitiveness. Private investment in related sectors, such as cement, steel, and construction, has increased in response to government spending. Innovative financing tools like InvITs and ESG-linked financing are also attracting private funds to infrastructure projects, boosting growth and creating a multiplier effect in the economy.

Improving efficiency in public expenditure

India has made progress in improving efficiency through systems like the Public Financial Management System (PFMS), Direct Benefit Transfer (DBT), and Government e-Marketplace (GeM). These platforms reduce leakages, enhance transparency, and ensure better value for money. Yet, challenges remain in infrastructure, social welfare, and education programs. Efficiency can be improved further through outcome-based budgets, linking allocations to measurable results, and independent expenditure reviews to identify overlaps and underperforming programs.

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Capital expenditure has been rising rapidly. From Rs 3.36 trillion in FY20, it reached Rs 10.19 trillion in FY25 and is projected to reach Rs 11.21 trillion in FY26. Its share in total government spending increased from 12.5% to about 21.6%, while the capital expenditure-GDP ratio nearly doubled from 1.65% to 3.14% over the same period. Studies show that each rupee spent on infrastructure generates around three rupees in economic output, demonstrating the multiplier effect of well-directed capital spending.

At the same time, India has maintained fiscal discipline. The fiscal deficit declined from a pandemic-high of 9.2% in FY21 to 4.8% in FY25 and is expected to reach 4.4% in FY26. This balance between growth-focused spending and fiscal consolidation has strengthened macroeconomic stability, reduced borrowing costs, and boosted investor confidence. The buoyancy in GST and direct tax collections has allowed for productive spending without sharply increasing debt.

A significant portion of government expenditure is committed to salaries, pensions, and interest payments, which limits funds available for development. To create more fiscal space, reforms are needed in subsidies, public sector salaries, and centrally sponsored schemes. Transferring untied funds to states and introducing flexible, medium-term expenditure frameworks, as done in countries like Estonia and Sweden, can also improve efficiency without compromising fiscal prudence.

India’s past three decades show remarkable transformation. Millions have been lifted out of poverty, access to education has expanded, mobile connectivity is nearly universal, and digital infrastructure like Aadhaar and UPI has transformed public service delivery. The next stage of growth depends on how efficiently public funds are spent, not just how much is spent. Investments in infrastructure, innovation, health, and education, coupled with transparent and result-oriented management, will drive India towards becoming a $10 trillion economy by 2047.

In conclusion, smart spending is more than a fiscal tactic; it is a development strategy. By using resources efficiently, India can achieve faster growth, reduce inequalities, and create a sustainable and resilient economy. Lessons from countries like Rwanda and Canada show that efficiency and fiscal discipline are not obstacles to progress—they ensure better results from the same resources. For India, smart spending is the key to realizing the vision of Viksit Bharat 2047.