In the equation
C+I+G+(X-M)= GDP
where C is consumption I stands for Investment G for govt spending and (Exports-Imports) always negative for India and even US.
with (C) under pressure in India because of demonetization and in US because of household indebtedness ,private (I) not taking place because the future looks more uncertain , (X-M) perpetually negative,the only way GDP can bounce back is through higher govt spending. The narrative looks good and economist and corporates both are clamoring for govt to do more spending to bring back growth. But the above chart should debunk the theory that higher govt spending is good for economy. It might give near term impetus and excitement to the market but ,but if you believe like me that government is by nature less efficient than the private sector, then higher government spending will mean more capital misallocation, which is not good for stock valuations in medium term .
In theory, higher government spending should give impetus to consumption through multiplier effect which may crowd-in private investment. It may not be sufficient to plot these two variables in a cause and effect framework. There can be a spurious relationship between the two. These are my views . Correct me if I am wrong. Keynesian push is inevitable in the current context.
since govt is not concerned with ROE it is a poor spender of capital. i believe in India’s case, capex will be done through PSU’s and return ratios of these PSU’s unless they are in monopolistic situation is never great. everybody loves free spending and deficit spending actually prepones GDP hence we are all silently praying for govt to announce big capex plans to jumpstart the economy. private sector return ratios start deteriorating when there is competition from public sector who is asked to spend money without any accountability