
The Budget, while in exercise in nominal numbers, is expected to help all of us live and aspire for a better real life. It is expected to help solve current problems and allow us to invest in our future. It is meant to be an exercise in continuity, with resource mobilisation and allocation choices being made for the long run. In addition, we need to prepare ourselves for uncertainties of life like COVID-19, policy mishaps (demonetisation and defective GST regime) and meaningless wars and conflicts.
Here, we assess the effectiveness of the union government's resource mobilisation and allocation strategy of the last decade and outline the changes that must be made for rebuilding our ability to grow and building an equitable society.
Government must own up creation of Economic as well as Social Infrastructure
At our stage of development, we need a large investment in economic as well as social infrastructure. We cannot afford to invest in one at the cost of the other. At the same time, the resource mobilisation strategy must combine a judicious mix of tax and non-tax revenue and borrowings. Given that we are a low middle-income society, we will be starved of capital for the foreseeable future. Consequently, our households and businesses, particularly the small ones, will have limited ability to take risk, and deal with uncertainty. Demonetisation, defective GST regime, and COVID-19 have only made it worse.
The government, therefore, must borrow the required amount and invest in our future. An obsessive focus on managing an artificially assigned fiscal deficit limit compromises our ability to help people aspire for a better life. We must not let hopelessness set in, which the RBI’s consumer confidence survey has been hinting at for a while. The survey’s Current Situation Index has been in the pessimism zone (score below 100) since June 2017, except for May, 2019.
In difficult economic situations, an average household is forced to cut down on discretionary expenditure, which is visible in sharp drop in enrolment (from its peak) in engineering colleges, declining household investment in housing, etc. The recent recovery in housing sector is reported to be K-shaped and the sector is expected to slow down this year.
We must also remember that we are yet to solve the problem of malnutrition, even if we believe that we have solved the hunger problem – free food to 80 crore people under PM-GKY does not support that belief, though.
We have highlighted the current challenges facing us in an earlier article -- Want growth? Just teach India better, keep everyone healthy and yes, drop those EV subsidies. If we want people to live better lives, we must address these challenges through consistent resource mobilisation and allocation strategy – a strategy that must address genuine concerns and is not swayed by short-term pressures from various lobbies.
Resource mobilisation: Government borrowing for a good cause isn’t bad finance
Our nominal as well as real growth in GDP during the post-COVID period has been lower, implying that we are yet to recover the COVID-caused output losses. For example, the real growth in income has fallen from a CAGR of 7.4% between 2014-19 to 4.3% between 2019-24. A large proportion of these losses have been borne by lower income households, young workers and small businesses.
In such a situation, it is important that our resource mobilisation through tax revenue slows down so that the households and small businesses are able to sustain their consumption, savings and investment levels.
We have done the opposite (Table 1), with our tax revenue growing faster than GDP by a margin of 2.7%, with tax revenue growing at 12% and GDP at 9.3% during 2019-24 period. Consequently, the tax revenue as a proportion of GDP was 9.2% during 2023-24, compared to 9.0% during 2013-14 and 8.2% in 2018-19.
The question that we must, therefore, ask is:
Was it the wisest strategy (tax revenue growing faster than the GDP), particularly given that the businesses were shut down, millions of people lost work and we experienced the largest reverse migration to rural India during the pandemic?
On the other hand, the growth in non-tax revenue was largely driven by significant increase in dividend by RBI and the public sector banks, compromising their ability toinvest and contribute to economic growth.
During the post-COVID period, the fiscal deficit has grown and is now 5.6% of GDP against 3.4% during 2018-19, which is, indeed, a wise policy. In situations where the households and small businesses are faced with uncertainty, the government must spend to help them survive and sustain their ability to grow.
Revenue Mobilisation: Larger burden for households and non-corporate businesses
As seen in Table 2 below, the tax burden has steadily shifted to households from corporations during the last five years, i.e., tax burden on corporations is down from 3.5% in 2019 to 3.1% in 2024. Lowering of tax rates for corporations during November 2019 has not really achieved the intended purpose, as reported by the media. In an ASSOCHAM organsed meeting, the CEA too exhorted businesses to be "large-hearted" and compensate contract workers for inflation. Given that the wage levels are still low in India, it is not sufficient to just compensate for inflation – the real wages have to grow. Real wages can grow only if we focus and people as well as capital productivity.
In addition, the indirect taxes collected by the Union Government are now at 6% of GDP and we have reports of widespread concerns about high tax incidence for households and the cost of complexity for business. The reported number frauds around Input Tax Credit highlight the fact that the corruption too has not gone away – eliminating corruption was one of the key motivations for implementing the GST regime.
Resource Allocation: Need for a balancing act
As seen in Table 1 above, the union government had mobilised 15% of GDP to meet our expenditure requirement during 2023-24. Consequently, the expenditure grew faster than GDP, with revenue expenditure growing at 11.7% (against the growth in GDP at 9.3%) and the capital expenditure growing 2.7x faster than the GDP (Table 3, below)
Our question in this context is:
Was the resource allocation strategy consistent with the household and business needs?
Capital Expenditure: What is it doing for an average household and the business?
Public expenditure on economic and social infrastructure is expected to lower the cost of living and improve the quality of life. Let’s look at the biggest component of our capital expenditure – roads and highways.
As seen in Table 4 below, we are currently investing about 0.89% of GDP in road transport and highways, up from 0.13% a decade ago. Unfortunately, our malfunctioning toll plazas, where we often find long queues, cause waste of fuel, under-utilisation of the vehicle fleet, loss in people productivity and contribute to intense pollution. Intense pollution around the toll plaza is health hazard for thousands of people who work at plazas.
Our current toll burden is 0.24% of GDP and is expected to grow at a CAGR of 13% during the next five years. With expected GDP growth being only about 10%, the toll burden will rise to 0.27% of GDP by 2030. We are nowhere near the promised 10-second waiting time even on a normal working day. Hence, all the adverse side effects will continue to cause harm to people and businesses.
The question that we must, therefore, ask is:
Are tolls becoming useless costs for households and businesses - costs without corresponding value?
Similarly, we are investing an increasing proportion of resources in railway infrastructure but without any significant positive impact on quality of service or congestion for an average commuter. A bullet train is a vanity project for most of us.
The only other major change in allocation is in the form of loans to states for capital expenditure. A loan to states, even if it is a long-term loan, serves a very limited purpose, given that our states are already overleveraged.
Urban India is expected to drive Growth, but is it getting the required investment in Infrastructure?
Given that the railways and roads take away nearly 50% of our capital expenditure budget, there is very little left for the rest of economic and social infrastructure.
Housing and urban infrastructure get just 0.09% of GDP, one-tenth of what is invested in roads, even when the government’s stated and implied strategy is to drive growth through greater urbanisation. Our cities are not liveable for most people, as 40+ of them rank among the Top 50 most polluted cities in the world. The cost of living is going up for everyone, as land prices have been spiralling over the years. In addition, the residents and businesses are expected to take care of their own security, sanitation, sewerage, public spaces, and so on.
If we do want our cities to drive growth, we must invest in urban infrastructure and delay further investment in vanity projects of multi-lane expressways and bullet trains.
Education and Healthcare: Is it possible to have a productive workforce without public investment?
Industry is not only looking for capable but also a healthy workforce, as is evident from the demand for 70- or 90-hour workweeks. However, we have handed over education and healthcare to the private sector, as the union government’s capital investment in education was about Rs. 13 crores during 2023-24 and that in health Rs. 1,843 crores. Capex under the Ministry of Health is meant for PM-SSY (Swasthya Suraksha Yojna). Such a miniscule investment in these two sectors is meaningless, given that the private sector has not been able to provide value for money in both these sectors, as is evident from under-utilised capacity in engineering colleges and reports of indebtedness with hospitalisation.
While we know that the states are responsible for providing these services, it is only the central government that can raise the required resources for these sectors and invest for the long run. An investment in these two sectors will not only reduce the household burden and help them reallocate their earnings to other areas of investment and consumption but also reduce the cost of doing business.
Revenue Expenditure: What is it meant for?
Our revenue expenditure, as % of GDP, is now at 11.8%, up from 10.6% during 2019 (Table 5, below). A large proportion (1.07% of the total increase of 1.2%) of the increase is explained by increased allocation for interest payments, food and fertiliser subsidies, and transfer to states for capital projects. In addition, the departments of Drinking Water and Sanitation and Indirect Taxes have received allocation to the extent of 0.16% and 0.08% of GDP, respectively, with drinking water allocation meant for rural drinking water mission and indirect taxes for GST implementation.
Subsidies and Incentives are not bad economics, if they help improve our life
Some of the most influential people in our economic and political leadership believe that we must contain revenue expenditure at any cost, and they often term them as freebies and revadis – a morally and economically wrong argument. People who believe that capitalism is the ideal way forward for economic progress must also know that capitalism, as currently practiced, causes inequity, which, in turn, causes inequality. An increase in inequity and inequality is neither good for growth nor for social progress. The level of subsidies has not been going up in any case.
Table 6 below the current level of subsidies provided by the union government is significantly lower (as % of GDP) than what it was in 2014, though it is marginally up as a result of the pandemic. An increase in food subsidy has been substantially offset by a reduction in petroleum subsidy.
As seen in the Table above (last three rows), the households are spending a higher proportion of their monthly expenditure on food and transport, post the pandemic – together the households are spending 46.3% of their expenditure on just these two heads, up from 45.1% in 2019.
Should we deny food and transport subsidies to the poor and low middle-income families, when we do know that food inflation has been much higher than general inflation, real earnings have not been growing, we have not recovered the output losses caused by the pandemic and the government has been collecting an increasing level of taxes on fuel and many other items of daily consumption?
Let’s now look at the way we manage the allocation process and the impact it has on planned execution.
Routing expenditure through funds or execution arms like NHAI, allows for cookie-jar accounting
During recent years, the government has chosen to set up multiple funds for managing various investment and spending programmes. For example, the Agriculture Infrastructure and Development Fund consolidates allocation from five different departments for 13 different schemes, with a total transfer of Rs. 129,535 crores during 2023-24 (Revised Estimates), but its spending was just Rs. 108,535 crores, leaving a closing balance of Rs. 21,000 crores.
Similarly, Madhyamik and Uchhatar Siksha Kosh had Rs 37,833 crore allocation (of which 24,100 was through unbugeted additional transfers), but utilisation being just Rs. 13,733 crores. The additional transfers were not part of the budgeted expenditure, and they showed up only in the revised estimates. Similarly, Nirbhaya and Universal Service Obligation Funds (Ministry of Telecommunication) have large unutilised funds with them.
The question, therefore, is:
Are we resorting to cookie-jar accounting by routing allocation through Funds, as the Statement 15 of the expenditure profile reports only revised estimates and not actuals?
Interestingly, the Revised Estimates are the same round numbers as the Budget. For example, the revised estimates as well as the budget for Modified Interest Subvention Scheme for 2023-24 are Rs. 18,500 crores – how is that possible? So is the case with many other schemes.
Even after taking these allocations and utilisation numbers on face value, the closing balance for 12 funds in Statement 15 is Rs. 1,49,413 crores at the end of fiscal year 2023-24.
During the current year, nearly Rs. 3,40,000 crores of capex and Rs. 4,60,000 is planned to be routed through funds. We can only make a guess about the level of actual under-utilisation that we may currently be living with.
The closing balance of 12 funds at the end of 2023-24 was Rs. 149,413 crores. An allocation that does not get spent makes no differerce to our lives.
Another example is the road transport allocation to NHAI. While the budget shows the amount having been spent on building roads, the funds could remain with NHAI or it could use them to repay loans, as it is doing during the current year. In short, the budget allocation may not necessarily be achieving their intended objectives in a specific period.
In summary, the budget is the most important mechanism for mobilising the required resources and allocating them to activities and programmes that help improve quality of life, build ability to grow and aspire us to do better. It is, therefore, important that we align our resource mobilisation and allocation strategy to household and business needs, where we don’t position household interest against the business or business interest against those of households.
Note on Shadow Budget
As part of our shadow budget series, we are presenting what we believe should be the most appropriate allocation at this stage as well as what we think the government is likely to do.
Our reason for doing so is that the government is shying away from owning the responsibility to invest in creating the required economic and social infrastructure and is coming under pressure to focus on fiscal consolidation and providing incentives just to business even when the business is not in a position to accelerate demand generation – that too after regular exhortation by the FM and CEA. We do hope that our 'likely budget' turns out to be wrong and the government allocates resources in line with the 'shadow budget'.