Two Decades Of Union Govt Finances In 6 Charts

The government earns its money from several sources including taxes, duties, non-tax receipts such as income from dividends, interest, profits, fines, fees, and other receipts from government activities. These constitute revenue receipts.

Then, as we will see tomorrow, the government lays out a proposed budget taking into account expenditure in various forms such as for central sector schemes, centrally sponsored schemes subsidies, transfers to states, and pensions. The budget also includes an estimate of the earnings.

Further, expenditure is categorised as revenue expenditure, which is the spending for the normal running of government departments and various services, interest charges on debt, subsidies, etc., and capital expenditure, which is the spending on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by the Union government to state and Union territory governments, government companies, corporations and other parties.

Typically, there is a gap between what the government intends to spend and what it expects to collect, which means the government has to borrow to fulfil the expenditure. This gap is the fiscal deficit. Further, the gap between revenue expenditure and revenue receipts is called the revenue deficit. And the borrowings needed for purposes other than interest payments constitute the primary deficit.

The ratio of tax to gross domestic product (GDP, or the value of all goods and services produced in the country) and debt to GDP serve as indicators of financial health of a country.

The FRBM Act was passed in August 2003 to ensure long-term macro-economic stability. The Act mandated the Union government to eliminate the revenue deficit by 2009 and reduce the fiscal deficit to 3% of gross domestic product (GDP) by 2008. Under certain circumstances, the government is allowed to exceed the annual fiscal deficit target.

For this analysis, we broadly divided the 20-year period into five phases:

1. 2003-08 which saw high growth and reduction in fiscal deficit;

2. 2008-10, when the economy was adversely affected by the global financial crisis;

3. 2010-19 when growth and fiscal consolidation resumed;

4. 2019-21 which saw the significant adverse impact of the pandemic; and

5. 2021-22 onwards.

Phase 1: 2003-08

During the first phase, the gross fiscal deficit of the Union government declined from 5.8% of GDP in 2002-03 to 2.6% in 2007-08. The revenue deficit--that is, revenue expenditure minus revenue receipts declined from 4.3% to 1.1%. The primary deficit--that is, the borrowings needed for purposes other than interest payments--also declined, with the primary balance turning around from a deficit of 1.1% of GDP in 2002-03 to a surplus of 0.9%.

This improvement in the fiscal position was due to both decreased expenditure as a proportion of GDP and increased revenue of the government.

Total expenditure declined from 16.9% of GDP to 14.5% by 2007-08. At the same time, the revenue receipts improved from 9.4% of GDP in 2003-04 to 11.1% in 2007-08.

The gross tax-GDP ratio also improved during this period by 3 percentage points, from 9.1% in 2003-04 to 12.1% in 2007-08.

Phase 2: 2008-10

The global financial crisis in September 2008 impacted the Indian economy, leading to a decrease in investment and consumption demand. To mitigate its adverse impact, the Union government increased its total expenditure to 16.1% of GDP in 2009-10 (from 14.5% in 2007-08 and 13.7% in 2006-07). The increased expenditure was aimed at countering the economic slowdown through increased public spending, which included various stimulus packages and investments in infrastructure and social programmes to boost demand and support recovery.

At the same time, revenue receipts declined from 11.1% in 2007-08 to 9% in 2009-10. The gross tax-GDP ratio declined to 9.8% in 2009-10, while the tax buoyancy--or the proportion of tax revenue growth to the nominal GDP growth--was as low as 0.2.

This led to an increase in deficit: gross fiscal deficit rose to 6.6%, revenue deficit to 5.2% and primary deficit to 3.2%.

Phase 3: 2010-19

During this phase, gross fiscal deficit fell from 4.9% to 3.4%, revenue deficit fell to 2.4% and primary deficit to 0.4% of the GDP.

But unlike in phase 1, this narrowing of deficit was more due to decreased expenditure--from 15.7% of GDP to 12.2%. This was accompanied by a fall in revenue receipts, from 10.3% of GDP to 8.4%. Unlike phase 1, where the gross tax-GDP ratio had risen by 3 percentage points, these nine years saw an increase of 0.7 percentage points to 11%, with tax buoyancy averaging 1.1 during this period.

But merely reducing expenditure, without increased revenue is unsustainable. In times of economic shock, increased expenditure would reverse these gains, which is precisely what was witnessed in 2020 with the onset of the Covid-19 pandemic.

Phase 4: 2019-21

The pandemic led to a significant increase in government spending to address the health crisis and provide economic relief. The government expenditure increased from 12.2% of GDP in 2018-19 to 17.7% of GDP in 2020-21. At the same time, the revenue receipts remained unchanged at 8.2% of GDP.

Therefore, the gross fiscal deficit rose to 9.2%, revenue deficit to 7.3% and primary deficit to 5.7% of GDP.

The centre’s debt-GDP ratio at 48.1% of GDP in 2018-19 increased to 61% in 2020-21.

Phase 5: 2021-22 onwards

Post pandemic, the Union government expenditure fell to 15.2% of GDP in 2023-24. Further, a larger portion of this spending compared to earlier years was on capital expenditure.

The thrust of capital expenditure has been on roads and railways, while the share of defence capex is reducing.

The multiplier effect--or the income generated for every rupee of spending--of the Union government’s capital expenditure is estimated to be more than three times that of revenue expenditure.

The Union government has also reduced subsidies from 3.8% of GDP in 2020-21 to 1.4% of GDP in 2023-24. Petroleum subsidies now constitute 0.04% of GDP compared to 0.8% in 2011-12. Fertiliser subsidies rose from 0.4% of GDP in 2017-18 to 0.9% of GDP in 2022-23, though they are budgeted to decline to 0.5% of GDP in 2024-25.

While the revenue receipts of the government remained around 9% of GDP during 2021-24, the direct tax-GDP ratio has increased in recent years, while the indirect tax-GDP ratio has been declining. The direct tax-GDP ratio improved from 3.7% of GDP in 2021-22 to 4% in 2023-24, while the indirect tax-GDP ratio declined from 4% to 3.9% in the same period.

Understanding these phases provides critical insights into the Union government's fiscal strategies, their effectiveness in navigating economic challenges, and the ongoing efforts to sustain financial health and growth in India.

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