At a time when India is struggling to attract private investment across several key sectors, including infrastructure, and calls have been made for higher public spending, the Economic Survey for 2020-21 has suggested that the government incurs more expenditure which would, in turn, spur private players to pitch in.
The survey, which was tabled in the Parliament by Union Finance Minister Nirmala Sitharaman on Friday, noted that for emerging economies such as India, an increase in public expenditure in areas that boost private sector’s propensities to save and invest, may enable private investment rather than crowding it out.
In an economy that has unemployed resources, an increase in government spending raises the aggregate demand in the economy, which may induce the private sector to increase their investment in new machinery to cater to the increased demand, and hence put the unused resources to productive uses, as per the document prepared by Chief Economic Adviser (CEA) Krishnamurthy V. Subramanian.
“If the public expenditure is directed to sectors where the fiscal multipliers are large – for instance for building infrastructure – such spending may significantly crowd in private investment as well,” it said.
It noted that recent research puts further doubt on the phenomenon of crowding out in rapidly growing economies by showing that the supply of savings is not fixed but expands with income growth.