Wednesday, March 4, 2015

Breaking down Budget 2015

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The Union Budget was declared recently to much fanfare on social media and in the corporate sector. Yet, as I tried to make sense of where exactly we spend our tax money, I could not get a clear picture. The best that I could get was the screenshot below at the Finance Ministry site.



We can do a lot better than that when it comes to showing citizens how their money is spent, so I decided to do a bit of digging around. The government of India has put up detailed expenditure statements at the Indian Budget site, and while it is not entirely comprehensible to folks not familiar with public finance (like yours truly), it can give a more holistic picture of how the budget is being spent. I primarily used these two documents to visualize our spending. Because I used my discretion to categorize the spending as Infrastructure-based or Food and Agriculture-based, this might have some minor errors (although it is fairly representative of the big picture).

Now that the disclaimers are done, here is how India plans to spend its funds in FY 2015-16.

A dark orange rectangle indicates increased spending compared to the previous year, while a blue rectangle indicates decreased spending from the previous year.

Some quick insights from this analysis:

1. Debt is strangling India's budget

The UPA government's reign saw India's external debt increase more than four-fold from $100 billion in 2004 to $450 billion in 2014. Subsequently, some analysts have cautioned the country about the possibility of falling into a debt trap - a situation where it needs to take on more debt in order to pay off its current loans.

To overcome this problem, the government needs to bring in higher revenues while reigning in spending. Yet, doing so at this juncture would be detrimental to the country's overall growth, especially as it needs greater investment in infrastructure.

I feel that the Modi government's approach to solving this conundrum is to invest heavily in infrastructure that will drive growth for now, while at the same time cutting down on subsidies. At the same time, it is trying to rake in more taxes through Goods and Services Taxes and Value Added Taxes, which ensure that it gains more revenue streams. Lastly, they are aiming to reduce India's tax rate from 30% to 25% while at the same time abolishing tax exemptions for corporations. This is aimed at making India a more attractive place for business while not reducing tax revenues.

Most importantly, it is very heartening to see India embrace the Public Private Partnership model to finance its infrastructure. By utilizing capital from private companies, the government's burden of financing is reduced. At the same time, more stringent oversight resulting in more efficient use of capital can be expected with private partners on board.

It's too early to see if their efforts will yield fruit, but they do seem like a step in the right direction.

2. The abolition of energy subsidies has had a massive impact - even in the face of low oil prices

The budgeted petroleum expenditure fell from Rs. 62743.22 Crore in 2014/15 to Rs. Rs. 30125.55 Crore for 2015/16. This are significant savings, and were largely achieved by the government's abolition of fuel subsidies. The impact of this will be even more significant once oil prices start to rise again. However, a significant subsidy on LPG and Kerosene still exists. It is significantly more difficult to get rid of these subsidies as doing so would be a very thorny political issue.

3. Food and Fertilizer Subsidies are still a huge problem

The Agriculture sector in India is a bit of a black hole for government money. It accounts for 15% of the country's GDP, but around 50% of employment. The sector is highly fragmented, and has unfavorable yields compared to other Asian countries - despite superior soil quality.

Because a very large chunk of Indian population depends on agriculture for livelihood, and because many in India are too poor to afford food, the government cannot cut down on food and fertilizer subsidies until a) the agriculture space gets consolidated and b) the output of food in India increases significantly, and its price decreases correspondingly.

I would like to see the government do more to improve the scene for agriculture in India. The Land Acquisition Bill is a good start. If passed, it would lead to a more rapid transition from agricultural work to manufacturing labour in the economy. But it would do little to solve the problem of the country's notoriously agricultural low productivity.

On the whole, I think that the budget is a monumental step in the right direction. I hope that the policies that follow will be in the same vein, too.

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