Reading between the Lines

Ashok K Nag

Annual budget of a large democratic nation like India is always a political statement couched in apparently neutral terms like investment, growth and welfare of general public, particularly vulnerable sections of them. In fact, the “political economy of budget” has been an important area of research for economists of all persuasions. The “political” aspect of the government budget making exercise is examined below from two perspectives–allocation of budgeted expenditure and financing of this expenditure. While examining a given year’s budget of any government, we need to underscore the fact that all components of this budget are not left to the discretion of its current maker. For example, interest payment is a legacy of past decisions and repudiation of the same can be ruled out in an electoral democracy. Similarly, not much discretion is left regarding expenditure for pensions to government employees. On the financing side of budget making also, the revealed preference of a political dispensation can be discovered only in evolving course changes.

Allocation of Resources
James Buchanan, a staunch critique of deficit financing, and a Nobel Laureate, wrote in “Democracy in Deficit”–“Politicians necessarily confront a tragic choice setting, for, being unable to satisfy all desires, they must deny the desires of some”. Undoubtedly, this choice is not unconstrained–it would also depend on the state of the economy and any other external shocks like COVID-19 that must be tackled by the politicians in power. The financial year 2023-24 is expected to be a normal year, and a year to be immediately followed by a general election. So, the revealed preferences of the politicians at the helm are expected to be more nuanced, than an unabashed show of preferences for their core constituencies.

Firstly, preferences can be discovered, albeit indirectly, from the occurrence of some selected words in a budget speech. The FY 23-24 budget speech is compared with the budget speech of FY 2015-16 below. The FY 2015-16 was the first full year when the current regime presented a full year’s budget.

Table 1: Occurrence frequency of selected words in the budget speeches of FY 16 and FY 24

Obviously, frequency of a word does not prove anything and there is no need to harp on it. It would be more worthwhile to look at the stated objectives in the budget of the above two years.

Quote from Budget 2015-16 para 16:
The year 2022 will be the Amrut Mahotsav, the 75th year, of India’s independence. The vision of what the Prime Minister has called ‘Team India’, led by the States and guided by the Central Government, should include:

i) A roof for each family in India. The call given for ‘Housing for all’ by 2022 would require Team India to complete 2 crore houses in urban areas and 4 crore houses in rural areas.
iv) substantial reduction of poverty. All our schemes should focus on and centre around the poor. Each of us has to commit ourselves to this task of eliminating absolute poverty.

Quote from Budget 2023-24 para no 14:
The Budget adopts the following seven priorities. They complement each other and act as the ‘Saptarishi’ guiding us through the Amrit Kaal.

1.    Inclusive Development
2.    Reaching the Last Mile
3.    Infrastructure and Investment
4.    Unleashing the Potential
5.    Green Growth
6.    Youth Power
7.    Financial Sector

Even if one ignores the above corporate style classification of various proposals for allocation of resources, a reader would have preferred to be informed about the progress made in implementation of the objectives stated in the 2015-16 budget.

But poverty continues to be a social and economic issue in India and in a span of 7 years it appears to have been “lost in oblivion” in the speech writer’s mindscape. Be that as it may, it will be more useful to look at the allocation of resources to various purposes.

Grouping of items given in annexure. The category “State” includes Defence, Home affairs, External Affairs, Planning, Pension and Interest, Tax Administration, Transfer to states and Union Territories

It is apparent from the above four tables that a substantial share of resources mobilised by the state (Centre here) are used up in maintenance of the state itself. Many of the services rendered by the state machinery, like Law and Order are public goods and only limited discretion is available to any political regime to tinker with them. If one only considers the Establishment Expenditure of the Centre, it is seen that it has come down from 18.7% of the Centre’s total expenditure for the FY2015-16 to 17.5% in the FY 2022-23 (RE) (data from Bag 6 of yearly budgets). Centre’s expenditure on welfare measures like expenditure on health, education, agriculture etc. has remained higher than all other broad categories of expenditure. Although there was effort to curtail this category of expenditures, as reflected in lower budget estimates, the actual expenditure turned out to be higher than the budgeted one. The BE of 2022-23 for the Welfare Programs’ share was cut by almost 5% but according to RE this share got cut by a little above 1% only. The BE for Welfare Programs’ 2023-24 has been sought to be cut by 5.5%. The intention to cut is clear, but the reality may again turn out to be different.

A more granular analysis provides some interesting insights into the choices made by the budget makers.

Of the total increase in BE of 2023-24, “Transport” accounted for 67.7%. It is quite clear that the current political regime is shifting its focus from alleviation of poverty to meeting the need of relatively affluent section of the society who cherish swanky national highways, faster train and a place in the world’s high table of economic powerhouses. The so called “aspirational India” now believes that a government’s job is primarily to build world class infrastructure. The consequent economic growth will take care of the festering problem of poverty, malnutrition and hunger. Accordingly, the Centre’s capital expenditure as percentage of its total expenditure has grown from 14.4% in 2016-17 to 17.4% (RE) by 2022-23. The budgeted growth in capital expenditure for FY23-24 has been estimated to be 22.2%.

However, increased capital expenditure by the Centre in the last few years has not generated commensurate increase in private investment. Between 2004-5 and 2013-14 the average rate of Gross Capital Formation as % of GDP at current prices was 37.5%. This rate came down to 32% between 2014-15 and 2020-21. In the FY 20-21, the rate reached a low of 27.3%. (see Chart 4 in the Annexure).

Financing of Budgeted Expenditure:
For a democracy with a significant presence of private capital owned production system, the government has mainly two sources of revenue- tax revenue and borrowing. The interplay of both these avenues defines what is known as Fiscal Policy. Following enactment of Fiscal Responsibility and budget Management act, 2003 the government is expected to take appropriate measures to limit the fiscal deficit up to three per cent. of gross domestic product by the 31st March, 2021. Only in exigencies, the limit can be increased by 0.5 per cent. As regards borrowing, the Act states that the Central Government debt does not exceed forty per cent., of gross domestic product by the end of financial year 2024-2025. It can be seen from the Tables below that this limit was breached in 2018-19 itself, a year before the pandemic struck the country.

The tables and the graphs given in the Annexure clearly demonstrate the revealed preference of the present political regime regarding financing of its expenditures. These (views of Budget makers and not the author’s) are summarized below:

1.    To finance the large increase in government’s capital expenditure, increased borrowing is favoured, while income tax rates for companies have been cut.

2.    Through Taxation Laws (Amendment) Act, 2019 (TLAA), a concessional tax rate of 22% for existing domestic companies Income tax rate was introduced. The tax income foregone on account of this concession for 2 years, namely 2019-20 and 2020-21 has been estimated at 1.8lac crore. This “freebie” provided to large corporates formed 18% of total expenditure by the Centre on subsidies in these two years.

3.    The share of subsidies in Centre’s revenue expenditure which had gone up from 9.7% in 2000-01 to 20.7% in 2012-13, reversed in trend and fell to 11.2% in the year 2019-20. Although it went up to 24.6% in the pandemic year (2020-21), it was again brought down to 11.2% by 2022-23. It is consistent with the economic philosophy that states “subsidies, or “soft budget constraint”, may distort firms’ incentives to innovate, raise quality, and reduce costs.” (OECD (2022), Subsidies, Competition and Trade, OECD Competition Policy Roundtable)

4.    Income tax revenue from corporate sector show some interesting features. Effective tax rate on profit of companies in the highest profit basket (above 500 cr.) is much lower at 19.14% than the average rate of 22.2% for all companies (FY2020-21). Effective tax rate on profit for manufacturing companies was much higher at 25.68% as compared to 20.75% for non-manufacturing companies. A surrealistic picture emerges if we look at Industry-wise Effective Tax Rates on profits as it can be seen for some selected industries–Special and Super-specialty Hospitals (94.43%); Health Care-Others (60.93%); Primary Education (54.36%); Research and Development (52.86%); General Hospital (37.31%); BPO services (28.23%); Manufacture of Tobacco Products (22.14%). There could be many reasons for inability of some industries to avail of the concessional rate, but it is incumbent on the Government of the day to remove such anomalies.

5.    Indirect taxes are paid by poor as well as rich. When the share of indirect taxes in total tax revenue increases, it has a disproportional adverse impact on the relatively poorer segment of the population. The share of direct taxes in total taxes collected by the Centre increased linearly between 2000-01 and 2009-10 from 36.3% to 60.38%

The budget of 2023-24 is the last full year budget of the current political regime. It is generally expected that a political party will be more inclined to distribute “freebies’ to win the electoral battle in such a year. Our analysis shows that this budget has deviated from this trend. But at the same time there has not been any effort to reduce budget deficit significantly. There are two possible reasons for this. Firstly, the regime is confident that the high approval rating of the current Prime Minster will be sufficient to win the coming general election comfortably. Secondly, the huge push to infrastructure related expenditure will make way for a new social compact encompassing those who have means and ability to be a part of “aspirational India”, leaving behind in lurch the marginalized people of India. Let me end with a quote from P. Sainath’s book “Everybody Loves a Good Draught”.

“Extremely poor people go into destitution making way for firing ranges, jet fighter plants, coal mines, power projects, dams, sanctuaries, prawn and shrimp farms, even poultry farms. If the costs they bear are the 'price' of development, then the rest of the 'nation' is having one endless free lunch.”

The FY 20-21 has been omitted because it was the year of pandemic and the Fiscal deficit jumped to 9.2% of GDP at market prices.

Reference:
Buchanan J.M. and R. E. Wagner (1977): Liberty Fund edition 2000, Democracy in Deficit.Pp190, Chapter 12.

Table 2: Major Item-wise Expenditure [% share in total excluding Pension and Interest]

Major Items                       Actual              Budget              Revised              Budget
of Expenditure                                          Estimate            Estimate           Estimate
2021-22            2022-23             2022-23            2023-24
Agriculture and Allied
Activities Excluding
PM-Kissan)                         2.80%               2.99%                2.54%               2.64%
Commerce and Industry    1.72%               1.90%                1.25%               1.51%
Defence                            13.42%             13.78%              13.64%             13.57%
Development of NE           0.10%               0.10%                0.09%               0.18%
Education                          2.94%               3.73%                3.33%               3.54%
Energy                               1.97%               1.76%                2.36%               2.98%
External Affairs                  0.52%               0.62%                0.57%               0.57%
Fertiliser Subsidy               5.63%               3.76%                7.50%               5.49%
Finance                              0.00%               0.76%                0.60%               0.43%
Food Subsidy                    10.58%              7.39%                9.57%               6.19%
Health                                3.08%               3.10%                2.58%               2.79%
Home                                 4.11%               4.54%                4.16%               4.23%
IT and Telecom                  0.92%               2.86%                2.47%               2.93%
Others                                3.97%               4.05%                3.60%               3.78%
Petroleum Subsidy            0.13%               0.21%                0.31%               0.07%
Planning                             0.14%               0.20%                0.21%               0.20%
PM-KISAN                          2.45%               2.43%                2.00%               1.88%
Rural Development           8.37%               7.38%                8.11%               7.47%
Scientific                            1.02%               1.09%                0.85%               1.01%
Social                                 1.49%               1.85%                1.55%               1.73%
Tax Administration            6.48%               6.14%                5.91%               6.11%
Transfer to states             10.05%             11.95%               9.03%              10.18%
Transport                          12.16%             12.58%              13.01%             16.21%
Union Territories               2.07%               2.10%                2.30%               1.92%
Urban Development          3.91%               2.74%                2.48%               2.40%

Table 3: Share of Pension and Interest in total Expenditure.

                                    Actual 2021-22    BE 2022-23        BE 2022-23       BE 2023-24
Total                                3793801           3944909            4187234           4503096
Pension and Interest       1061802           1147783            1185431           1314330
Share of Pension
and Interest                       28.0%               29.1%                28.3%               29.2%

Source Budget at Glance (Bag 6 2023-24)

Table 4: Share of Major Item Groups in total Expenditure including Pension and Interest Payments

Major Item Groups   Actuals 2021-22  BE-2022-23       RE-2022-23      BE 2023-24
Energy                               1.42%               1.25%                1.69%               2.11%
Industry                             1.24%               1.35%                0.90%               1.07%
Miscellaneous                   2.86%               2.87%                2.58%               2.68%
Science and Technology    1.39%               2.80%                2.38%               2.79%
State                                 54.48%             57.52%              54.41%             55.53%
Transport                           8.76%               8.92%                9.33%              11.48%
Welfare                             29.86%             25.29%              28.71%             24.35%

Table 5: Share of Major Item Groups in total Expenditure excluding Pension and Interest payments:

                                   Actuals 2021-22  BE-2022-23       RE-2022-23      BE 2023-24
Energy                               1.97%               1.76%                2.36%               2.98%
Industry                             1.72%               1.90%                1.25%               1.51%
Miscellaneous                   3.97%               4.05%                3.60%               3.78%
Science and Technology    1.93%               3.95%                3.32%               3.94%
State                                 36.79%             40.09%              36.40%             37.19%
Transport                          12.16%             12.58%              13.01%             16.21%
Welfare                             41.46%             35.67%              40.05%             34.38%

Note: Expenditure on “State” includes transfer by Centre to States and Union Territories

Table 6: Top 2 Items by reduction /enhancement in expenditure allocations in 2023-24 Budget Estimates:

Top 2 items for which              Amount of Reduction        Share in total of items
BE for 2023-24 is                                                                   witnessing reduction
less than RE of 2022-23
Food Subsidy                                        89844                                  54.7%
Fertilizer Subsidy                                  50120                                  30.5%
Top 2 items for which               Amount of Increase          Share in total of items
BE for 2023-24 is                                                                   witnessing increase
more than RE of 2022-23
Transport                                             126538                                   36%
Transfer to States                                 53705                                  15.3%

Annexure: Tables and Graphs

Table A1: Categorization of Items of Expenditure of the Centre

Item of Expenditure        Category               Item of Expenditure              Category
Pension                               State              Commerce and Industry            Industry
Defence                              State                  Development of NE               Welfare
Fertiliser Subsidy              Welfare                       Education                       Welfare
Food Subsidy                    Welfare                          Energy                           Energy
Petroleum Subsidy           Welfare                   External Affairs                     State
Agriculture and Allied
Activities Excluding
PM-Kissan)                       Welfare                         Finance                           State
PM-KISAN                         Welfare                          Health                          Welfare
Home                                  State                          Scientific                     Science and
Technology
Planning                              State                             Social                          Welfare
Rural Development          Welfare                Tax Administration                  State
Transfer to states               State                    Union Territories                   State
Transport                        Transport              Urban Development              Welfare

Table A2: Shares of Major Heads of Revenue and Expenditure in corresponding total

                   2016-17    2017-18    2018-10    2019-20    2021-22    2022-23    2023-24
(Actual)    (Actual)     (Actual)    (Actual)     (Actual)          (RE)          (RE)
Tax revenue
as % of Total
Revenue           80.1       86.6%        84.8%       80.6%        83.2%       88.9%       88.5%
Capital receipt
as % of total
receipt           30.4%       33.0%        32.9%       37.3%        42.8%       43.9%       41.5%
Borrowing
as % of Capital
Receipts        89.1%       83.6%        85.2%       93.2%        97.6%       95.5%       95.5%
Tax as % of
total receipt  55.8%       58.0%        56.9%       50.5%        47.6%       49.8%       51.8%
Centre’s Capital
expenditure as %
total
expenditure  14.4%       12.3%        13.3%       12.5%        15.6%       17.4%       22.2%
Interest
payment as %
of total
expenditure  24.3%       24.7%        25.2%       22.8%        21.2%       22.5%       24.0%
Effective
capital exp as %
of total Exp   22.8%       21.2%        21.6%       19.4%        22.0%       25.2%       30.4%
Revenue
Deficit as %
of GDP                2.1            2.6             2.4            3.3             4.4            4.1            2.9
Fiscal Deficit
as % of GDP        3.5            3.5             3.4            4.6             6.7            6.4            5.9
Fiscal Deficit = Total Expenditure – (Revenue receipts + non-liability
generating capital receipts)

Table A3: Income tax forgone due to implementation of concessional tax rate

Total Income             Total Tax               Total Tax at              Revenue          Revenue
under 115 BAA         Collection         concessional rate           impact             impact
(2019-20)                  At earlier          at under 115BAA         (2019-20)        (2020-21)
corporate rate
9,33,429.91            3,22,780.06            2,34,944.31             87,835.75        96,399.74

Source: 17th Report of Estimates committee

Table A4: Tax Profile of Companies by Range of Profits before Taxes

Financial Year 2020-21

FY 2020            No of          Share in    Share in        Share in         Ratio of      Tax to
-21 Range        com-            profit         total             total             tax to         profit
of Profits         panies          before      income       corporate          total          ratio
before                                   taxes                         income tax       income
taxes                                                                          liability
100 to
500 cr               1558             15.33         14.10            15.53             26.96         22.49
Greater
than 500 cr       517              62.08         47.58            53.52             27.54         19.14
Total              961279                                                                       24.49         22.20
Source Table1: page 30 Receipt Budget 2023-24

Table A5: Effective Tax Rate of Companies in FY 2020-21

Manufacturing and Non-Manufacturing Companies

Effective tax rate      No of companies        Share in total profits       Effective tax rate
Manufacturing                  144141                            29.46                             25.68
Non-Manufacturing          817138                            70.54                             20.75
All Companies                   961279                                                                 22.20

Source: Table 4: Page 31 Receipt Budget 2023-24

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Vol 55, No. 39, Mar 26 - April 1, 2023