HYDERABAD: At 75, she's highly indebted. The post-independent India may or may not live a debt-free life, but that's not the bad news, as most countries have been thriving with borrowed money.
The pesky little fact is, we may have to wait several years to witness the country's first balanced budget, where revenue equals expenditure, without taking out fresh loans. Unbelievably, all budgets till date have been deficit budgets, barring one or two when finances were in surplus way back in 1949 and 1950.
That said, deficit budgets aren't necessarily evil for a developing India, while spiritless balanced budgets don't necessarily bring untold fortunes. However, a balanced budget where expenditure isn't consciously curtailed represents the might of an economy. Should that happen, India may well be on course to be a superpower.
Typically, budgets are classified into three - surplus, deficit and balanced. Textbook theory dictates that a surplus budget is one when revenue exceeds expenditure. Here growth rates are higher and employment at full-throttle translating into higher tax revenue taking care of all expenditure. Few countries are currently in this bracket.
When spending outstrips income, it's a deficit budget, where governments borrow, just like households relying on costly credit to bridge the gap. Deficit budgets occur when the economy is weak, unemployment high and tax revenue is behind both potential and estimates -- a situation that India is currently coursing through.
Governments cannot cut expenditure and hence borrow to spend in order to keep growth engines humming, if not breaking into a run. India was a poor country post independence and though the taxation regime was sound, it suffered an exceptional crisis, compelling successive governments to raise cash through internal and external borrowings.
India isn't alone. Just look around and you'll see debt doves everywhere. Take America, which runs a fiscal deficit of $22 trillion, higher than its own $20 trillion economy. Agreed, deficits are essential, especially when economic growth needs a boost, but not all debt-fueled expenditure is acceptable. For instance, recent sops like the Rs 75,000 crore income support scheme for farmers further deepen deficits, unlike self-sustainable infrastructure.
In short, deficit budgets somewhat imply governments' irresponsibility, while surplus budgets indicate an unwarranted tax burden. This leaves us with the last option, balanced budgets. However, this too is fraught with limitations as it assumes that economies will grow predictably and that revenue and expenditure will always be in sync, while the reality is starkly different.
Fresh loans were pegged at Rs 7.1 lakh crore for FY20 or roughly 26 per cent of the annual budget. Clearly, it's impossible to imagine a budget where fresh debt remains next to nothing, unless of course under three different scenarios.
One, the government gets a windfall eliminating the need to raise new loans, but it's ruled out as even the almighty RBI reserves are estimated just about Rs 3 lakh crore. Two, curtail expenditure, but such a move harms growth and could oust incumbent governments. Three, increase tax revenue, which appears plausible, but by the time revenue plays catch up, expenditure too would've commensurately increased leading to deficit yet again.
What we need in Finance Minister Nirmala Sitharaman's forthcoming Budget next Friday is all three. Retire some of the existing debt (reduces interest outgo), raise tax collections from corporates, and rich individuals and lastly, trim wasteful expenditure including needless subsidies (as Milton Friedman famously said, spending is taxation) as all government debt must be paid off eventually by us taxpayers.