Demystifying the Union Budget

In recent times, all the hype and hoopla surrounding the Union Budget presentation has served to obscure the most important aspect of the exercise — taking stock of Central government finances. The truckloads of jargon used to describe Budget metrics also diverts attention from the true state of Central finances. So, if we were to line up the Union Budget numbers over the years and strip out all the Greek and Latin, what trends would we uncover?

Receipts track nominal growth

Thanks to obliging taxpayers and generous one-off donors like public sector undertakings, the receipts of the Central Government (loosely, its income) have grown at a fair clip in recent years. From FY14 to FY19, Central receipts, without considering borrowings, shot up by 73 per cent from ₹10.4 lakh crore to ₹18.1 lakh crore at an annual growth rate of 11.6 per cent. Expenditure grew at a slower clip, expanding at 9.6 per cent annually from ₹15.5 lakh crore to ₹24.4 lakh crore. (All numbers mentioned are actuals or revised estimates from Budget documents/RBI.)

Despite this seeming frugality though, the Centre’s expenditure still overshoots its receipts by about 35 per cent (FY19 revised estimates). This ₹6.3 lakh crore gap is the fiscal deficit. In its FY20 Budget, the Government had hoped to bump up its receipts by 12 per cent to ₹20.3 lakh crore, to step up spending by 11.8 per cent to ₹27.3 lakh crore. But data from the government accountant tells us that this plan has come unstuck.

In the first eight months of FY20, Government expenditure had already topped ₹18.2 lakh crore — 65 per cent of the full-year estimate, while its receipts were at ₹10.1 lakh crore, less than half the annual projection. This has forced the Centre to scramble to slash expenses or raise additional taxes in the remaining months.

But this last-minute scramble is unlikely to help much this year, because the shortfall in receipts can be directly traced to the sharp slowdown in India’s nominal GDP growth. In the last five years, Central government receipts, growing at 11.6 per cent, have tended to move closely in step with India’s nominal GDP growth of 11.1 per cent. In FY20 however, the CSO projects that India’s nominal GDP growth will plummet to 7.5 per cent.

A sizeable fiscal deficit overshoot therefore seems inevitable this fiscal. For FY21, the Centre may have no option but to go in for modest revenue and expenditure targets, to fall in line with sluggish nominal growth.

Consumption versus investing

Folks who live life king-size will surely empathise with a persisting problem that the Indian government has faced over the years. It has limited room to invest in assets after taking care of the routine stuff.

In the five years from FY14 to FY19, as the Central budget expanded from ₹15.5 lakh crore to ₹24.4 crore, the proportion of that money it managed to allocate to capital expenditure remained stuck at 12 per cent. The FY20 Budget was no different. In effect, 88 per cent of the Centre’s expenses today fund ‘consumption’ items at the expense of long-term investments. Low capital spending particularly hurts arms of the Government which need to be well-equipped and battle-ready. In FY20, while defence bagged a ₹3 lakh crore allocation, over ₹2 lakh crore of this was to go into revenue spending.

This has led to a situation where despite spending big every year, the Central government has little by way of hard assets to show for it. Based on Budget documents, the Centre’s cumulative capital investments to create assets added up to just ₹40 lakh crore by March 2019. That’s not much, given that it splurges ₹24 lakh crore a year.

Carving out more room for capital spending is essential to ensure that Budget spending is productive and yields measurable paybacks in the long run. Instead of trying to blur the lines between capital and revenue, the upcoming Budget needs to redraw them in red ink.

Subsidies and pensions

Ever tightened your belt on some item of personal expense, only to find a new one cropping up? The Centre’s efforts at reining in its revenue spending have met with the same fate.

Five years ago, fuel subsidies at ₹85,000 crore and fertiliser subsidies at ₹68,000 crore took up 10 per cent of its revenue expenses. After much clamour, it decontrolled some items and better targeted its subsidies to prune subsidies to 4.4 per cent of its revenue expenses by FY19. But that didn’t make a dent on revenue expenses, because interest payouts, food subsidies, salaries and pension payouts to government staff bloated to occupy this space.

Between FY14 and FY19, the Centre’s interest payouts shot up from ₹3.8 lakh crore to ₹6.2 lakh crore. With central agencies trying to alleviate farm distress through procurement, the food subsidy bill almost doubled from ₹92,000 crore to ₹1.7 lakh crore. The Seventh Pay Commission payouts have expanded the annual salary bill by 93 per cent from ₹82,000 crore in FY14 to ₹1.6 lakh crore in FY19, while pension payments are up 127 per cent from ₹74,000 crore to ₹1.7 lakh crore.

In fact, as per its Budget estimates, the Centre’s pension payouts to legacy staff would have overshot its salary bill in FY20. Effectively this fiscal, the government had already committed to spending 26 per cent of its revenue budget on interest, 15 per cent on salaries and pensions and 13 per cent on subsidies, leaving less than half the money for discretionary public spending and welfare schemes. This points to a crying need for expenditure reforms.

Slowing growth in receipts will further shrink this elbow room in FY21. All the industry lobbies clamouring for a stimulus, need to note that Government finances are yet to recover from the stimulus it has already been handing out for the last three years — the Pay Commission payouts.

Debt dilemma

If you routinely spend more than you earn, you’re likely sitting on a mountain of debt. The Indian exchequer, after running up persisting fiscal deficits and borrowing to fund them, is no exception.

RBI data tells us that the total liabilities of the Central government are likely to stand at about ₹102 lakh crore by end of FY20, up from ₹58.5 lakh crore in FY14. In the five years to FY19, the annual addition to India’s debt pile, at 9.9 per cent, was significantly lower than the nominal GDP growth of 11.1 per cent.

The growing denominator helped the Centre cap its debt-GDP ratio at under 50 per cent. But the dip in nominal GDP growth this year makes it an uphill task to keep this metric under check. One can only be thankful that over 95 per cent of the Government of India’s borrowings are from the Indian public who may take a far more benign view of it, than foreign lenders.

In short, should the Union Budget on February 1 prove to be short on stimulus measures and long on taxes, the commentariat should keep these numbers in mind before launching its attacks. If your household budget was in this state, what would you do?

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