Saturday, July 29, 2017

Making it easy to understand Indian budget 2017

Understanding any government budget can be daunting as the numbers involved are huge. Not only the numbers are so large, they are often presented with reference to different big numbers. For example, sometimes one number is reported as percentage of GDP (gross domestic product i.e. total output of a country in a year)and another number as either percentage of government expense or percentage of government revenue. I have decided to take these numbers as percentage of adjusted union budget. I am avoiding reference to the GDP as government only has control over the budget; GDP is not within its control. In order to prepare adjusted union budget, I have added back the state’s share of the union taxes which the budget subtracts as I thought adding it back will provide a better picture. So the total budget amount is Rs. 27 lakhs, 74 thousand 228 crores out of which 6 Lakhs 74 thousand 565 crores is states share which union budget excludes. Apologies for such large numbers, I promise I will not provide any such large number going forward at least in this post.


In the interest of understanding, I would try to avoid the exact numbers, rather I would round off to the nearest  whole number. Once we get the hang of the quantum of the amounts, we could always refer to the budget document For exact numbers. For more details refer to DISBURSEMENTS and RECEIPTS sheets of STATEMENT I - CONSOLIDATED FUND OF INDIA - REVENUE ACCOUNT for union Budget 2017.


Note: This post does not consider state’s revenue and expenses which are even larger than the union budget in aggregate. I will provide consolidated details in my next post.


So let us get started and consider as if the total union budget size is 100 rupees, then various expenses and income would be as under.


Starting with the government expenses, out of 100 rupees, 34 rupees are allocated for states and union territories, 25.5 for economic services, 19 for repayment of debt servicing, 16 for general services minus debt servicing, and 5.5 rupees for social services.


Going further about the details of the expenses: Out of 34 rupees allocated for states and union territories, 25 rupees are state’s share of the union taxes and 9 rupees are other grants for states and union territories. 19 rupees have to be set aside for repayment of the loan that the government takes every year to cover budget shortfall. That leaves the government with 47 rupees.


Out of 47 rupees, 31 rupees are allocated for social and economic services and 16 rupees are allocated for general services. Breaking down 5.5 rupees for social services, we find that 3 rupees are allocated for education and 2.5 rupees are allocated for other social services. Drilling down in to 25.5 rupees for economic services, we find that 7 rupees are allocated for agriculture, 2 rupees for rural development and irrigation, 7.5 rupees for transport including rail, shipping, road etc., 2.5 rupees for industry and minerals, 2 rupees for energy including petroleum, 1.5 for special area program for north east, 1 rupee for communication, 80 paisa for science and technology, and 70 paisa for general economic services.


Out of 16 rupees spent on general services, 6.5 rupees are allocated for defense, 5.5 rupees for pensions, 3 rupees for administrative services which includes police, 40 paisa for tax collection, and 30 paisa for organs of state which includes expense on administration of justice; elections; Parliament/State/Union Territory Legislatures; President, Vice President/Governor, Administrator of Union Territories; and council of ministers.


Note: the expense on organs of state is so less; even then, we fret a lot about it as it is visible to us. this is an example of availability bias.


Another expense which is noteworthy because we spend so little is administration of justice. As part of organs of state, the expense on judiciary is just 3 paisa. Should we still wonder that it takes 10 – 20 years to decide a case?


Where does the government find money to spend on the above items? First and the foremost source is commodities and service tax (which is now goods and services tax); it contributes 33 rupees. second source is non-tax revenue such as railway , communication, postal service and various other government operations; these contribute 20 rupees. Third source is corporate tax which contributes 19 rupees. And the last source is income tax other than corporate tax (mostly individuals) which contributes 16 rupees. That leaves the government with a shortfall of 12 Rupees, and for which the government borrows money every year. This borrowing has resulted in a debt of 2.5 times the total budget amount. The borrowing and the debt result in high inflation as government has to pay back less if value of money goes down.


The objective of this exercise has been to understand how the government earns money and how it spends. We will get in to more details in the future posts regarding various categories of these expenses.