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India: Looking through the ‘US’ glass - Views on News from Equitymaster
 
 
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  • Feb 26, 2003

    India: Looking through the ‘US’ glass

    Budget 2003-04 will be tabled in the Parliament in a couple of days. So far most of the analysis has been limited to historical evaluation of India’s fiscal performance. In this article, however, we attempt to analyse our budget vis-à-vis the budget of the largest economy in the world, United States of America.

    To begin with, let us look at a couple of figures relating to the two economies. The Indian economy is quite small in terms of the size as compared to the US. India’s GDP (FY02) was a meager US$ 480 bn compared to the enormous US$ 10,337 bn of the US. In percentage terms, India’s GDP is less than 5% of the US economy. As far as the operational part of the US government goes, US had a fiscal deficit of 1.5% of GDP in FY02 compared to a fiscal deficit of 5.7% of GDP in India.

    Revenue picture

    Now, let us see how does our income statements compare. In FY02, India garnered its revenues largely from the tax paying community. Tax revenues contributed almost 2/3rd to the government’s revenue kitty. Non-tax revenues contributed another 30%. Divestment proceeds also had a 6% share in the revenues. As for the US, tax revenues contributed half of its revenues while insurance and retirement receipts contributed another 38%.

    One major difference between India’s profit and loss account statement and that of the US is the fact that the US includes pension and insurance related revenues and receipts in its income statement, whereas Indian income statement does not include these figures. However, there is a debate on in the US with regard to the inclusion of these pension and insurance related revenues and receipts in the budget, as many policy makers in the US feel that it gives a misleading picture on the country’s economic strength.

    While tax collections form a bulk of revenues for both these economies, tax as a percentage of GDP for India is lower at 8.5% as compared to 10% in the US. However, the major difference is in the percentage of people that pay taxes. In India, only about 0.4% of population files tax returns, let alone pay taxes. Compare this to the US, where over 25% of the population is tax paying.

    The expense picture:

    Approximately 66% of the US$ 2 trillion US expenditure is on human resources. This includes expenditure on education, training, employment and social services, and also on senior citizen benefits and income security. Compared to this, India’s biggest expense head is servicing of existing debt, i.e., interest at 29%.

    A good thing to note for India is that 27% of total expenses are towards plan expenditure. However, the bad news is only 40% of this is allocated to planned capital expenditure meant for long-term development. More than half of the total plan expenditure is a revenue expenditure aimed at maintaining the existing infrastructure rather than creating new ones.

    US allocates 17% of its expenditure on defence, compared to a similar 16% by India. However, as a percentage of US GDP, defence expense stands at 3.4%, whereas in India’s case this ratio is lower at 2.5% of GDP. But the point to note here is that US being a developed nation can afford to spend so much on defence, but should a developing nation like India spend so much on defence, which is a non-developmental expenditure?

    India spends a whopping 18% on administration. This is because the government runs a lot of departments and thus has to spend on administering their running. Also, the government size is considered to be too big and many a times we have seen the Indian FM making muted references to reducing the government size. But till date, nothing concrete has happened on this front, with center and the state governments creating jumbo cabinets.

    A look at India's income statement brings out the reasons why we continue to under perform. Take the composition of expenditure for example. With almost 46% of India’s resources (revenues) diverted to servicing debt, little is left to spend on infrastructure and social services, both of which are essential for strong long term growth. If we add the administration and the subsidies to the cost of servicing debt, then these 3 heads together account for nearly 90% of India’s resources. Add the 25% spent on defence and we have almost 115% of revenues being spent on only non-developmental exercises. However, there is no doubt the scenario has improved in the last decade, but the gaping hole in the budget continues to more or less remain at the same level (nearly 6% of GDP).

    Defence continues to account for 1/4th of India’s total revenues, and therefore it continues to hamper growth both for our country, as well as for its neighbors, who too have expensive defence budgets. Another concern is that the share of plan expenditure (both revenue and capital), which formed over half of India’s revenues (53%) in FY94, has come down to just over 40% in FY02. Interest as a percentage of revenues continues to hover over 45% levels in the last decade. On the revenues front, tax share has come down from 65% of total to 61% in the last 10 years.

    However, it must be said that in the last decade, India has made some progress on putting its development strategy on course. Compared to FY94, where non-plan expenditure like administration formed 23% of revenues, it now forms 19% in FY02. Similarly, subsidies, which formed 16% of revenues in FY94, are now only 13% of revenues.

    What does India need to do?

    • Tighten its own belt, i.e., fiscal discipline in running the government’s ship.

    • Time bound phasing out of all forms of subsidies. Instead, focus should be on empowering individuals through education and higher technical training, which aids individuals, run their farms and other small operations profitably through cutting edge technology.

    • Expand the tax base by including all income groups.

    • Try and limit defence expenditure, though we understand it is difficult, keeping in mind the geo-political situation in the sub continent.

    • All this will free precious resources and encourage the government towards announcing more measures for infrastructure development.

     

     

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