Demystifying the Union Budget (Union Budget must help us focus on central finances)

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 Demystifying the Union Budget (Union Budget must help us focus on central finances)

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• Hype and hoopla: There is so much noise around the annual Budget exercise, that the real question – how are union govt. finances doing - remains obscured. Time to simplify it all
• Receipts and nominal GDP growth: Govt receipts (income via taxes) has grown steadily from 2010 onwards.

1. From 2014 to 2019, central receipts grew by 73% from Rs.10.4 trillion to Rs.18.1 trillion (11.6% p.a.)
2. Expenses grew at 9.6% p.a. from Rs.15.5 tr to Rs.24.4 tr.
3. So spendings are 35% more than incomes. That Rs.6.3 tr gap is fiscal deficit.
4. In 2019-20 Budget, govt claimed that revenues and expenses would be Rs.20.3 tr and Rs.27.3 tr, resp.That has failed in a big way, sadly.
5. Sharp slowdown in nominal GDP growth has led to a collapse in tax collections. Both are linked - taxes @ 11.6% p.a.and nominal GDP @ 11.1% p.a.  (2020 figure is 7.5% only).

• Consumption and investing: The govt. spends so much on daily expenses, it has little left for capital assets.

1. Budget size went from Rs.15.5 tr in 2014 to Rs.24.4 tr in 2019.
2. But capital expenditure is stuck at 12% of that. So 88% expenses are revenue heads, and not long-term
3. Defence capital spending is sharply down, and of Rs.3 tr in 2020, more than Rs.2 tr was revenue heads.
4. So, overall cumulative capital investments (to build assets) was only Rs.40 tr by March 2019.(annual spend Rs.24 tr!) Where will future growth come from?

• New demons keep appearing: In 2014, fuel and fertiliser subsidies took up 10% of revenue expenses (Rs.85k cr and Rs.68k cr).

1. So fuel was decontrolled, and better targeting of fertiliser was done. By 2019, subsidies were 4.4% of revenue expenses.
2. But interest payouts, food subsidies, salaries, pensions took that space.
3. Interest payments went from Rs.3.8 tr to Rs.6.2 tr (2014 to 2019)
4. Food subsidy went from Rs.92k cr to Rs.1.7 tr.
5. Seventh Pay Commission took salary bill from Rs.82k cr to Rs.1.6 tr (93% up), and pensions up by 127% to Rs.1.7 tr.
6. Add it up - 26% on interest, 15% on salaries and pensions, 13% on subsidies. So less than half left for public spending and welfare. So, expenditure reforms needed, and no stimulus possible.

• What about debt: Deficits add up to Debt. Government has been running annual deficits, and borrowing from markets to fund those. So debt is high.

1. Total liabilities of govt. are Rs.102 tr by March 2020, up from Rs.58.5 tr in 2014.
2. Annual addition from 2014 to 2019 was 9.9%, lower than nominal GDP of 11.1%.
3. So debt-GDP was restricted to below 50%. But 2019-20 collapse in nominal GDP is bad news.
4. Happily for govt., 95% borrowings are not from foreign but Indian public. So no currency shocks!

• Prediction: The govt. has no room for stimulus now, but would tax more.
• Summary : The govt. is left with no room for any new stimulus, but is in dire need to raise new taxes.

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