Quality of Public Expenditure (QPE) index
 
The Quality of Public Expenditure (QPE) Index is a framework developed by the Reserve Bank of India (RBI) to measure how effectively government funds are spent, not just in terms of total expenditure but focusing on the composition of spending and its impact on long-term economic growth and development.
 
Key Indicators of the QPE Index:
 

• Capital Outlay to GDP Ratio: Measures government spending on infrastructure and development projects relative to GDP. A higher ratio denotes better quality expenditure indicating stronger commitment to building productive capacity.
• Revenue Expenditure to Capital Outlay Ratio: Compares routine operational expenses (salaries, pensions, subsidies) with long-term capital investment. A lower ratio is preferred, reflecting fiscal discipline and prioritization of growth-enhancing spending.
• Development Expenditure to GDP Ratio: Tracks spending in sectors like healthcare, education, research, and social welfare, which improve human capital and economic productivity. A higher ratio indicates better quality expenditure.
• Development Expenditure as a Percentage of Total Expenditure: Higher proportions signify greater focus on productive investments and developmental goals.
• Interest Payments to Total Government Expenditure Ratio: Reflects the fiscal burden of past borrowings. A lower percentage is indicative of better debt management and fiscal sustainability.

 
Significance and Outcomes:
 

• The QPE index helps policymakers understand the efficiency and effectiveness of public spending, guiding fiscal policy towards balanced and sustainable growth.
• It highlights trends since 1991, categorizing India’s public expenditure trajectory into six phases, from early liberalization to post-pandemic recovery.

• 1991–1997: Early liberalization improved Central expenditure quality slightly, but states struggled with fiscal pressure and declining investment.
• 1997–2003: Quality declined due to salary hikes (Fifth Pay Commission), rising interest payments, and dominant revenue expenditure.
• 2003–2008: Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act improved fiscal discipline, increased capital outlays, and reduced interest payments.
• 2008–2013: Global Financial Crisis (GFC) stimulus improved spending temporarily but strained fiscal stability.
• 2013–2019: Higher development spending by states fueled by the 14th Finance Commission and GST revenue sharing improved states’ QPE, though Central challenges persisted.
• 2019–2025: Covid-19-related fiscal stimulus caused a temporary dip in quality, but the post-pandemic recovery driven by increased capital expenditure has significantly improved expenditure quality.

• Recent data suggests that India’s expenditure quality reached its highest level in 2024-25 since 1991, driven by increased capital expenditure and improved fiscal management.
• The index also establishes that higher quality expenditure at the Centre is strongly associated with GDP growth, while at the state level it improves human development outcomes.

 
In essence, the QPE Index is a comprehensive tool assessing not just how much money is spent by governments but how it is spent, emphasizing sustainable investment over mere consumption, thereby supporting robust and inclusive economic growth.

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