Budget Consolidation and Social Sector Spending: Does Fiscal Contraction Endanger Growth of Human Capital in India?

Abstract

This study analysed the short- and long-term impacts of fiscal consolidation on social sector spending in Indian economy and thereby on human capital. Using autoregressive distributed lag framework, the study found that fiscal adjustments have significant potential to undermine the short- and long-run spending in human capital. A fiscal adjustment aimed at strengthening fiscal position of the Indian economy can have adverse impacts on the growth rate of income. Lower-income growth will imply increased constraint on part of the government to spend in public utilities like education and health. Similarly, a fiscal adjustment based on slashing government spending can adversely impact both short- and long-term welfare spending as these spendings are mainly financed by deficits. The policymakers while framing the design of a consolidation programme need to take extra precaution as far as the composition of these adjustments are concerned. Moreover, there is need of legislate aimed at changing the nature of welfare spending from discretionary to compulsory.