Have Acche Din Arrived? Part 10: Government Expenditures, Revenues, and the Fiscal Deficit
One of the achievements the Modi Sarkar is proudest of is the reduction of the Fiscal Deficit to 3.7% of GDP. What is this achievement? Does this herald good times for India?
First, let us look at the claim and verify that it is true. The fiscal deficit is simply bookkeeping: it is the excess of expenditures over revenues in the government’s accounts. Since both receipts and expenditures scale with the size of the economy – if there are more people earning, then there will be more direct tax revenues, for example – all receipts and expenditures are calculated as a percentage of GDP. The attached figure shows the fiscal deficit for the last four governments. The Modi government’s fiscal deficit indeed is the lowest since 2008. The term averages for the NDA, UPA I, UPA II, and Modi Sarkar are 5.3%, 4.0%, 5.4%, and 3.7% of GDP. We see that the two governments with the worst fiscal deficits are the Vajpayee government and UPA II, and the two governments with the best deficits are UPA I and the Modi Sarkar. To put this in perspective, India’s 2018 GDP was Rs. 170950 billion, or (dividing by 70 as the exchange rate) about $2.4 trillion. So a 0.1% of GDP translates to $2.4 billion or Rs. 17,000 crores.
The difference between the UPA II and Modi governments’ fiscal deficits is 1.7% of GDP (though only 0.3% lower than UPA I). Where is this reduction in the deficit of nearly Rs. 2.9 lakh crores coming from?
To find out, let us next look at the gross fiscal total expenditures and receipts/revenues of the different governments. The term average total gross fiscal revenues of the NDA, UPA I, UPA II, and Modi Sarkar are 9.2%, 10.2%, 9.4%, and 9.2% of GDP. The term average total gross fiscal expenditures of the NDA, UPA I, UPA II, and Modi Sarkar are 14.5%, 14.3%, 14.8%, and 12.9% of GDP. We can therefore see that the lower fiscal deficit is due to reduced government expenditures, rather than higher government receipts (indeed, receipts for the Modi Sarkar are 0.2% of GDP lower than those of UPA II). Let us look further into each of these.
The two main subdivisions of expenditure are capital expenditure and revenue expenditure. Revenue expenditure is what is needed to pay salaries, interest payments, pensions, and subsidies. Generally speaking, revenue expenditure is what the government needs for its normal running and maintenance – maintaining government offices, paying salaries of government workers, etc. Capital expenditure is what is needed to create capital assets in the country or reduce liabilities. Examples are building roads, railways, bridges, dams, and various other public works.
The total expenditure figures of the government are slightly different from the expenditure figures used in GFD calculations, and come to 15.6%, 14.8%, 15.0%, and 13.0% of GDP for the NDA, UPA I, UPA II, and Modi adminstrations. Let us see where the 2% reduction in total expenditure comes from.
The capital expenditure figures for the NDA, UPA I, UPA II, and Modi governments, as a percentage of GDP, are 2.8%, 2.2%, 1.8%, and 1.7%, respectively. We can see that capital expenditure has been steadily decreasing over the years.
The revenue expenditure figures for the NDA, UPA I, UPA II, and Modi governments, as a percentage of GDP, are 12.8%, 12.6%, 13.2%, and 11.3%, respectively.
Thus, we can see that the lower fiscal deficit for the Modi Sarkar in comparison to UPA II is largely due to lower revenue expenditure – by 1.9% of GDP.
The two major heads under revenue expenditure are defence revenue expenditure (salaries, etc., for the armed forces and organizations related to defence), and subsidies, such as MGNREGA or the RTE subsidy schemes. Let us look at each of these.
Defence revenue expenditures, as a percentage of GDP, for the NDA, UPA I, UPA II, and Modi governments are 1.6%, 1.3%, 1.2%, and 1.1%, respectively. This indicates that defence revenue expenditure has been consistently going down under different administrations.
Subsidies for the NDA, UPA I, UPA II, and Modi Sarkar are 1.4%, 1.6%, 2.4%, and 1.8%, respectively. So the reduction of subsidies, from 2.4% of GDP to 1.8% of GDP, is a significant reduction in expenditure under the Modi Sarkar, as was the increase from 1.6% in UPA I to 2.4% in UPA II, which is probably connected to schemes such as MGNREGA, RTE, and FSB.
So, of the 1.9% reduction in revenue expenditure, there is a 0.1% reduction in defence revenue expenditure, and a 0.6% reduction in subsidies. We can account for 0.7% of the reduction in expenditure directly; the remainder must be efficiency improvements in the federal administration of operational expenses.
Since there is a 0.1% reduction in capital expenditure, let us take a closer look at the components of capital expenditure. The main component of capital expenditure is called capital outlay, the other component being loans and advances.
Capital outlay is the amount used in building capital assets in the country such as highways, railways, bridges, and the like. The capital outlays for the NDA, UPA I, UPA II, and Modi Sarkar, as a percentage of GDP, are 1.2%, 1.6%, 1.6%, and 1.5%. Thus, there is a 0.1% reduction in capital outlay under the Modi Sarkar.
We should also mention capital expenditure for defence here, even though it is not included in the calculation of total expenditure (it is a separate head). The capital expenditure figures for defence, as a percentage of GDP, for the NDA, UPA I, UPA II, and Modi governments, are 0.6%, 0.8%, 0.8%, and 0.6%. There is therefore a significant reduction in defence expenditure under the Modi Sarkar: about Rs. 34,000 crores.
As was mentioned earlier, the revenues for the Modi Sarkar are 0.2% (of GDP) lower than those of UPA II. Let us look briefly at the revenue side of the balance sheet now.
Total revenues for the government mainly comprises of tax revenues, non-tax revenues, and capital receipts. Before discussing tax revenues, let me explain what capital receipts and non-tax revenues are.
Capital receipts refer mostly to government borrowings, such as treasury bills (government bonds) and hence are a liability for the government. Capital receipts also include disinvestments, loan recoveries of loans to state governments, external loans (from IMF, WB, etc.), and small saving such as post office deposits, kisan vikas patras, and national savings certificate.
Nontax revenues are all the revenues of the central government that come from sources other than taxes. Examples include dividends and profits from PSUs, revenues from operation of government-controlled transport corporations, power distribution, irrigation, banking services, stamp printing, postal services, toll taxes on roads, etc.
Direct taxes consist of two parts: personal income tax and corporation tax. Direct tax collection figures (term averages) for the NDA, UPA I, UPA II, and Modi administrations were 2.3%, 3.9%, 4.1%, and 3.6% of GDP, respectively. Thus, direct tax collection, on average, has gone down significantly during the Modi Sarkar. However, when we look at the graph, we realize that direct tax collection went down in the second year of the Modi Sarkar (2015-16), then went up in 2016-17 and 2017-18.
We can understand this better by looking at the two components of direct tax revenues. Personal income tax collection figures for the four administrations in sequence are 0.9%, 1.4%, 1.4%, and 1.4%. There does not seem to be much difference in the average personal income tax collection. This should be understood in the context of claims that demonetization led to a huge increase in direct tax income because of greater compliance. If we see the graph of direct tax income, we do see that the direct tax income went from 1.3% of GDP in 2015-16 to 1.5% in 2016-17 to 1.6% in 2017-18 – but that “rise” is only because the tax collection actually dipped by 0.2% in 2015-16 – the value in 2014-15 and 2013-14 were both at 1.5% of GDP. We can conclude, therefore, that personal tax collection has not significantly improved despite claims to the contrary.
Corporation tax (tax paid by corporates), on the other hand, has significantly reduced under the Modi sarkar. The figures for corporation tax as a percentage of GDP under the NDA, UPA I, UPA II, and Modi administrations are 1.3%, 2.5%, 2.6%, and 2.1%, respectively.
In a country like India, where tax compliance is not very good, improving direct tax collection is an important goal of any administration. A 0.5% drop in direct tax collection during the Modi Sarkar is not a good sign.
Indirect taxes are taxes that are not levied on individuals or organizations but on goods and services. Examples of indirect taxes are sales tax, VAT, service tax, customs, excise, countervailing duty, entertainment tax, octroi, luxury tax, taxes on alcohol, taxes on petroleum products, and GST, which subsumes many of these taxes under one umbrella. Indirect taxes are considered regressive because they disproportionally affect the poorer segments of the population. For example, a tax on petrol or diesel affects even poor people through the prices of bus, train, and auto fares, as well as increased prices of vegetables and foodgrains because of increased transport costs. Similarly, GST charged on food in restaurants will be a burden on poor people much more than they will be on rich people. It is therefore better, if one is concerned with “acche din” for the “aam aadmi” (common man), to reduce indirect taxes. Indirect taxes incurred by providers of goods and services are passed on to customers, making those goods and services costlier for everyone.
The total indirect taxes, as a percentage of GDP, for the NDA, UPA I, UPA II, and Modi administrations are 3.9%, 4.0%, 3.2%, and 3.6%. Thus, we see that indirect taxes went up slightly (0.1%) during UPA I, went down 0.8% in UPA II, and rose 0.4% in the Modi Sarkar – that’s about Rs. 68,000 crores extra as a financial burden on the common man.
One important component of indirect taxes is excise. Excise has been subsumed under GST, but is still represented on the balance sheet as a significant component of indirect taxes. Excise is a tax that is paid for every unit of a commodity that is produced. For example, if you make matches, you have to pay an amount for every match produced – and that extra cost is passed on to everyone who buys matches, rich or poor. The excise figures for the NDA, UPA I, UPA II, and Modi administrations are 2.3%, 2.1%, 1.3%, and 1.5%, respectively. Thus, we see that the UPA administrations reduced excise greatly – by 0.2% of GDP in UPA I and by 0.8% of GDP in UPA II, but the Modi Sarkar has increased excise collections by 0.2% of GDP.
Nontax Revenues and Capital Receipts
Nontax revenues for the NDA, UPA I, UPA II, and Modi administrations are 2.7%, 2.1%, 1.8%, and 1.6% of GDP. Given that one of the guiding aims of neoliberal economic policy since the late 1990s has been greater privatization and more disinvestment, a gradual reduction in the nontax revenues of government, which comes mainly from government operation of PSUs and other government businesses, is to be expected. The Modi Sarkar’s performance is, therefore, in line with that of previous governments.
Total capital receipts for the NDA, UPA I, UPA II, and Modi administrations are 6.7%, 4.8%, 6.0%, and 4.1% of GDP. The main component of capital receipts is government borrowing, which for the four administrations are 3.5%, 2.9%, 5.1%, and 2.8%. Government borrowing has greatly decreased in the Modi administration, and this is because the fiscal deficit is lower – governments have to borrow from banks in order to finance the fiscal deficit.
• The gross fiscal deficit has considerably reduced, by about 1.7% of GDP, during the Modi Sarkar relative to previous administrations, and this is good news for the country.
• It appears that the fiscal deficit has been achieved in large part by reduction of expenditure by about 2% of GDP.
• This, in turn, seems to have been achieved by reducing revenue expenditure by 1.9% of GDP.
• A major portion of this reduction is a reduction in subsidies by 0.6% of GDP.
• Defence revenue expenditure has been reduced by 0.1% of GDP.
• The balance of the reduction in revenue expenditure (1.3% of GDP) can be attributed to greater efficiency in the running of government, in the absence of any information of higher granularity. This is certainly good news.
• Capital outlay has reduced by 0.1% of GDP.
• Defence expenditure has reduced by 0.2% of GDP.
• Direct tax revenue has reduced by 0.5% of GDP, reflecting poor tax compliance.
• Of this, personal income tax collection has remained relatively constant at 1.4% of GDP.
• Corporate income tax collection has gone down by 0.5% of GDP.
• Indirect tax collection has increased by 0.4% of GDP.
• Of this, excise tax collections have increased by 0.2% of GDP.
• Nontax revenues have been steadily decreasing over time.
• Capital receipts have significantly decreased, and this is a direct result of a lower fiscal deficit – government borrowings have decreased by 2.3% of GDP.
Efficiency improvements in administration do mean “acche din” for the people, and this is reflected by a 1.3% of GDP reduction in revenue expenditure that cannot be attributed to subsidies or defence revenue expenditure. This has led to a fiscal deficit of 3.7%, which is 1.7% lower than that of UPA II, and 0.3% lower than that of UPA I, and has also resulted in lower government borrowing to the tune of 2.3% of GDP.
Subsidies have been reduced by 0.6% of GDP. While this is good news for the financial health of the nation as a whole, poor and underprivileged sections of society will be hard hit by this, as subsidies are a lifeline for many of them. This is not “acche din” for them.
Defence expenditure has gone down substantially under the Modi Sarkar: capital expenditure has gone down by 0.2% of GDP, and revenue expenditure has gone down by 0.1% of GDP. Certainly not “acche din” for our defence establishment or the families of our defence personnel.
Personal income tax collection has remained roughly the same as in previous administrations, notwithstanding all the claims about increased tax collection in the wake of demonetization.
Corporate taxes have gone down by a whopping 0.5% of GDP, or roughly Rs. 85,000 crores, annually. This suggests that the corporate sector is not very healthy. No “acche din.”
Indirect tax collection has increased by 0.4% of GDP, or roughly Rs. 68,000 crores, annually. This is certainly not “acche din” for the lower middle class and poor people in the country, as it pinches their pockets hard, and reverses years of lowering of indirect taxes.
One should also note that the lowering of the fiscal deficit has been helped by reducing defence expenditures (0.3%) and raising indirect taxes (0.4%) to compensate for the reduction of corporate taxes (0.5%). These reveal something about the priorities of the Modi Sarkar. Had these three steps not been taken, the fiscal deficit would have been 4.9% instead of 3.7%, which is just a little lower than UPA II’s 5.4%, and much higher than UPA I’s 4.0%.