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The hole in the budget - Views on News from Equitymaster
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  • Feb 21, 2001

    The hole in the budget

    Let’s come straight to the point. The central government is expected to incur a deficit (excess of spending over revenues) of over Rs 1,100 bn (5.3% of the gross domestic product) this year. Incurring deficits is not always a flawed strategy. Not surprisingly, we incur deficits for reasons that do not justify them.

    Simply put, the government incurs expenditures under two heads – developmental and non-developmental. Expenditure on defence, subsidies, administration and interest qualify as non-developmental expenditure as they do not generate any income stream or add to the revenue generating capacity of the economy. Developmental expenditure on the other hand is incurred on items like infrastructure, which basically support or add to the revenue generating capacity of the economy. Therefore, if a country were to incur an acceptable level of deficit due to it’s increasing spend on developmental activities, it is justified to some extent. The corollary runs that the better infrastructure (just for example) will help improve revenues for the economy as a whole, a part of which will in turn come back to the government as tax revenue.

    The hole in the budget
    Rs bn FY94 FY01 (BE) CAGR (%)
    Revenue Deficit 327 774 15.4%
    Fiscal Deficit 552 1,113 12.4%
    Primary Deficit 185 100 -9.7%

  • More on the Indian Economy

    India's deficit is largely the result of sub optimal tax collections (which we will discuss at some other point in time) and burgeoning non-developmental expenditure. On the expenditure front, the government refuses to toe the line as far as non-developmental expenditure is concerned. Indeed, over the years, in an attempt to put a lid on the deficit, the government has trimmed developmental expenditure. This has greatly impacted various sectors of the economy that are dependent on the government for support.

    Consider this, the total non-developmental expenditure borne by the union government is in the vicinity of Rs 2,500 bn i.e. over two times the fiscal deficit. The developmental expenditure meanwhile is anticipated to be Rs 2,726 bn. The numbers may not seem alarming. But consider the proportions: non-developmental expenditure as a proportion of the overall expenditure has grown from 40% in FY91 to 48% in FY01 (BE). Alarmingly, the growth in non-development expenditure shows no sign of slowing down.

    Non – Development (Revenue) Expenditure
    Rs bn FY94 FY01 (BE) CAGR (%)
    Interest 367 1,013 18.4%
    Defence 150 407 18.1%
    Subsidies 127 228 10.2%
    Administration 189 640 22.5%
    Total 833 2,288 18.3%

    It is not that the non-developmental expenditures are not required. On the contrary they are very important for the economy as they provide a number of support services (like the police).

    However, it is the growth in such expenditure that is the concern. The government's efforts at controlling this expenditure have at best been limited to strong statements on the size of the government.

    Going forward, the government will need to take some harsh decisions. Key among these measures would be steps to ‘right size’ the government. Whether our politicians actually practice what they preach will be known shortly.



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