Free Reports

The "Ineffective" Budget is Another Representation of India's Big Government.

Feb 5, 2018

28

In the budget speech, the finance minister Arun Jaitley made last week, he promised a lot of different things to different sections of the country.

But his core promise was this: "This year's Budget will... particularly focus on strengthening agriculture and rural economy, provision of good health care to economically less privileged, taking care of senior citizens, infrastructure creation and working with the States to provide more resources for improving the quality of education in the country."

While the finance ministers say a lot of things in their speeches, what is worth checking is whether they follow up their rhetoric with the actual allocation of money. The budget, at the end of the day, is an allocation of how much money the government plans to spend on different things, and how it plans to earn that money.

Let's go through the finance minister's statement one by one and see the kind of allocation that he has made.

Table 1: Agriculture and Allied Activities
Total money allocated
(in Rs Crore)
Total expenditure of the budget
(in Rs Crore)
Proportion of money allocated
to agriculture
2016-2017 50,184 1,975,194 2.54%
2017-2018 56,589 2,217,750 2.55%
2018-2019 63,836 2,442,213 2.61%
Source: Author calculations on data from www.indiabudget.nic.in

Table 1 tells us that the total allocation to agriculture has gone up marginally for the next financial year. But is it enough to finance everything that the finance minister talked about in his budget? I have my doubts about that.

Table 2:
Education Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 72,016 3.65%
2017-2018 81,869 3.69%
2018-2019 85,010 3.48%
Source: Author calculations on data from www.indiabudget.nic.in

The proportion of money allocated to education has gone down than in comparison to this financial year. The same is true for health and rural development, as can be seen from the next two tables.

Table 3:
Health Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 39,005 1.97%
2017-2018 53,198 2.40%
2018-2019 54,667 2.24%
Source: Author calculations on data from www.indiabudget.nic.in

Table 4:
Rural Development Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 113,877 5.77%
2017-2018 135,604 6.11%
2018-2019 138,097 5.65%
Source: Author calculations on data from www.indiabudget.nic.in

The allocation to the social sector has gone up marginally in the next financial year, as can be seen in Table 5.

Table 5:
Social Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 31,812 1.61%
2017-2018 38,624 1.74%
2018-2019 44,220 1.81%
Source: Author calculations on data from www.indiabudget.nic.in

Table 6 has the data for transport sector. I guess a part of it would also be used to create road infrastructure. In this case, the allocation has been increased substantially as a part of the overall budget.

Table 6:
Transport Year Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 102,220 5.18%
2017-2018 107,092 4.83%
2018-2019 134,572 5.51%
Source: Author calculations on data from www.indiabudget.nic.in

The point is that, other than infrastructure, all the other sectors that the finance minister talked about, have more or less seen the same allocation of funds as an overall proportion of the budget in the next financial year, as they had seen in this financial year. Given this, all the new announcements and schemes, need to be taken with a pinch of salt. Either, they won't happen at all or they will happen at the cost of other schemes, which are already in place. The third option is that the finance minister spends more than what he has budgeted for and in the process, does not meet the fiscal deficit target. This has its own set of repercussions.

Hence, the flexibility that the government has is fairly limited. While it can announce new schemes, its ability to allocate funds to a new scheme and implement it successfully, as we shall see, is rather limited. This isn't surprising because the bulk of the budget of the union government goes towards meeting regular expenditure and meeting expenditure for schemes which are already in place. Take a look at the next 5 tables, starting with Table 7.

Table 7:
Interest repayment on outstanding Total money allocated (in Rs Crore) Proportion of money allocated
2016-2017 480,714 24.34%
2017-2018 530,843 23.94%
2018-2019 575,795 23.58%
Source: Author calculations on data from www.indiabudget.nic.in

Nearly, a fourth of the government's budget goes towards paying the interest on its accumulated debt. The government runs a fiscal deficit, i.e., its expenditure is more than its income. The gap is filled through borrowing. Interest needs to be paid on this debt.

Table 8:
Pension Total money allocated
(in Rs Crore)
Total expenditure of the budget
(in Rs Crore)
Proportion of money allocated
2016-2017 131,401 1,975,194 6.65%
2017-2018 147,387 2,217,750 6.65%
2018-2019 168,466 2,442,213 6.90%
Source: Author calculations on data from www.indiabudget.nic.in

Pensions form a significant portion of the expenditure and this has only gone up over the years.

Table 9:
Defence Total money allocated
(in Rs Crore)
Total expenditure of the budget
(in Rs Crore)
Proportion of money allocated
2016-2017 251,781 1,975,194 12.75%
2017-2018 267,108 2,217,750 12.04%
2018-2019 282,733 2,442,213 11.58%
Source: Author calculations on data from www.indiabudget.nic.in

Rather surprisingly, despite all the Pakistan rhetoric, the proportion of money allocated for defence has fallen. Take a look at Table 10 and Table 11. The allocation of money to subsidies has gone up, where as allocation to salaries gone down.

Table 10:
Subsidies Total money allocated
(in Rs Crore)
Total expenditure of the budget
(in Rs Crore)
Proportion of money allocated
2016-2017 204,025 1,975,194 10.33%
2017-2018 229,716 2,217,750 10.36%
2018-2019 264,336 2,442,213 10.82%
Source: Author calculations on data from www.indiabudget.nic.in

Table 11:
Salaries Total money allocated
(in Rs Crore)
Total expenditure of the budget
(in Rs Crore)
Proportion of money allocated
2016-2017 181,263.2 1,975,194 9.18%
2017-2018 195,989.2 2,217,750 8.84%
2018-2019 207,576.1 2,442,213 8.50%
Source: Author calculations on data from www.indiabudget.nic.in

If you sum up the proportion of money allocated to interest on outstanding debt, pensions, defence, subsidies and salaries, around 60 per cent of the budget is already taken (there might be some double counting here, and hence, I say around 60 per cent of the budget and not over).

This does not leave much scope for other things. Hence, while the finance minister Arun Jaitley (or for that matter the ministers before him), would want us to believe that their budget is significantly different from the previous ones, most budgets are more or less the same. They are only different in the speeches that accompany them.

Also, any new announcements of new schemes, should be taken with a pinch of salt, primarily because there are many schemes out there already. As the Economic Survey for 2016-2017 points out: "The Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India... If the states were included, the number of schemes would be orders of magnitude larger."

What does this tell us? It tells us that it is very easy for the governments (both central as well as states) to launch design and launch a scheme. As Devesh Kapur writes in an essay titled The Political Economy of the State: "Each centrally sponsored scheme has the resources of a particular central ministry to call upon to aid in its design, stipulate conditions for disbursement and so on."

This explains the fact why there are 950 central government schemes because it is very easy to launch a new scheme. The trouble is in the implementation. As Kapur writes: "The delivery is necessarily by the local administration (the district administration and, now increasingly by the Panchayati Raj Institutions). Few states have the administrative capacity to access grants from [so many] schemes, spend money as per each of its conditions, maintain separate accounts and submit individual reports."

The budget just reflects the Indian government, which over the decades, has tried to do everything for everybody, and in the process messed things up. The ambition of the union government needs to be smaller than it currently is, in order to be able to deliver on things which matter the most. These are areas like education, health, agriculture, infrastructure, rural development, defence etc.

As economist Kaushik Basu writes in An Economist in the Real World-The Art of Policymaking in India: "One mistake early Indian policymakers made was to try to micromanage the economy. While it is true that the government needs to attend to a range of policies, from shipping to the quality of education in villages, to managing the nation's international economic relations, it is imperative to realise that it is not feasible for the government to attend to all the varied and layered needs of society with equal diligence."

As Basu further adds: "An intelligent government recognises that no matter what kind of society it aims to build [emphasis original], it is hopeless to try to deliver it all by itself."

To cut a long story short, for the budget to be effective, India's big government needs to go.

Warm Regards,
Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "The "Ineffective" Budget is Another Representation of India's Big Government.". Click here!

4 Responses to "The "Ineffective" Budget is Another Representation of India's Big Government."

Gautam M

Feb 8, 2018

After long time some good post from Vivek Kaul's diary. Comparisons provided is good, however I beg to differ on the statement that FM statement is untrue due to these statistical numbers. The statement points to the fact that focus will be on these areas. No govt can shut down ongoing schemes at a wholesale without being called vindictive by opposition, it is in the manner in which the schemes will be executed for results that matter. While it is technically impossible to put high visibility in all the 1000 of schemes, the govt based on the need of the hour will put focus on those areas only. Modi is known for his master execution of schemes and let us trust his judgement in how he delivers. He still has one full year to deliver these.

Like 

Sudhir Mahale

Feb 7, 2018

How these values are estimated?. If income is estimated on 100% tax collection, and we do collect 100% then we have abundant provision. Next is expenses. Does the money budgeted is delivered to the intended use without any leakage in pipe line, then we need not worry about deficit. We invariably see the original estimate of any project increased to many-fold at the time of implementation. Where this extra money goes? In final report we see money budgeted is spent as per the expense head but what about project wise spend? All projects are lingering on. It starts with land acquisition. All opposition parties start opposing the location, cost , alternate accommodations and so on. Finally we see that money allocated to transportation is consumed. but all projects are in as it is state. Where this money goes.

Like 

satish dabholkar

Feb 6, 2018

First everyone should see that what ever tax due to the goverment it should be paid immediately.When budget income rises as seen more numbers of tax payers have been brought under tax neby present government..
Mr Kaul was against demontisation when Goverment was acting against tax avoiders.His argument does not justify as 60% budet amount is spent on adminstration as if government increase his tax earning it will have more balance to spend for budgetary proposals.He should have justified demonetisation.
We do not like to read Mr Kaul's article as his arguments are against interest of the economy.

Like 

Kishan Sharma

Feb 5, 2018

Yes, Vivek Kaul is on dot here. I agree fully "India's big government must go". A smaller, more effective government is the need for India.

Like 
  
Equitymaster requests your view! Post a comment on "The "Ineffective" Budget is Another Representation of India's Big Government.". Click here!