In 2019-20 Government has so far spent 77% more than its income!

Published: December 26, 2019 at 1:49 pm

The consolidated monthly Account of the Union Government of India up to the month of October 2019 for the Financial Year 2019-20 was recently released. The total spending is Rs. 16,54,905 crores,  a good 77% more than its total revenue! What are the different heads of income and expenditure for the government? An explanation.

The Government of India has received Rs.9,34,460 crore up to Oct 2019. Out of this, 73% is from tax revenue; 24% non-tax revenue; 1% from recovery of loans; 2% from disinvestment proceeds.  The total expenditure incurred is a whopping 177% of the total revenue.

Out of the total expenditure, a good 20% goes to service debt via interest payments. Another 16% is due to major subsidies.  Unless the revenue-expenditure gap decreases, the infrastructure of the country cannot grow, our tax burden will remain high. We need a gradual but steady transition from subsidy to opportunity. The former will ensure the poor remain poor.

About the author: Anjesh Bharatiya is a 30+ taxman by profession and a Chemical Engineer by education. He has been an investor in the stock market since age 15! He likes to write about personal finance, stock markets, government policies, taxation, philosophy and football.

Expenditure statement of the government of India in the last four financial years
Expenditure statement of the government of India. Source: http://prsindia.org/

These are the annual and monthly accounts of the Government of India. Just like any listed company, the Government of India also publishes its accounts from time to time. For understanding the state of our economy, understanding where the Government gets its money from and where it spends it is very important. In this article, we will try to understand some of the important terms that occur in these statements.

Budgeted estimates (BE)

These are the budget allocations announced at the beginning of each financial year.  They comprise of the estimated receipts and expenditure of the Government that the Finance Minister (FM) brings out in the Annual Budget every year in the Parliament.

Revised Estimates (RE)

These are the mid-year estimates of projected amounts of receipts and expenditure until the end of the financial year taking into account the trends of the Government’s income & expenses for the year.

Revenue Receipts

All receipts of the Government that are routine & recurring in nature and that do not involve the sale of any asset are called revenue receipts. They include the following:

Tax Revenue: As the name suggests, these are the net tax receipts of the Government. This head includes the proceeds of both direct taxes (Income Tax, Corporate Tax etc.) and indirect taxes (GST, customs duty etc.) after deducting the refunds paid.

Non-Tax Revenue: This head includes interest payments (received on loans given by the Centre to states, railways and others) and dividends and profits received from Public Sector Enterprises. Some services provided by the Government like railways, police, medical services etc. also earn revenue for the Government.

Capital Receipts

Capital receipts are generated when the Government liquidates an asset (disinvestment) or recovers loans given to states and the like. Also called non-debt capital receipts, they are non-recurring and non-routine in nature. For example, the Government announces a disinvestment target every year during the Budget in which it outlines the Public Sector Enterprises in which it intends to sell a stake and the estimated proceeds it hopes to generate from the exercise.

Devolution to states

Based on a formula prescribed the Finance Commission (a constitutional body formed every five years), the Centre devolves a fixed percentage of its tax revenue to the states. The 14th Finance Commission recommended increasing the tax devolution of the divisible pool to states to 42% (from 32% earlier) for the years 2015 to 2020, the single largest increase ever recommended.

Revenue Expenditure

Expenses like salaries, subsidies and interest payments on loans which are regular and recurring in nature form the revenue expenditure of the Government. A major contributor to this head is subsidies that Government provides in various sectors & products like fertilizers, LPG, food etc.

Capital Expenditure

Expenditure made for acquiring and creating assets like land, buildings, equipment (including defence) etc. forms part of capital expenditure. It also includes the Government’s investments and loans given that are expected to yield future income. If you observe closely, Government’s capital expenditure as a percentage of total expenditure has been showing a downward trend which reflects the fact that the less productive revenue expenditure has been eating into the potential asset creation funds of the Government.

Revenue Deficit

The excess of expenditure over receipts under the revenue head is called the revenue deficit. That this deficit exists reflects that the Government does not generate enough revenue receipts to pay for its revenue expenditure. In an ideal world, this should be a surplus or at least be zero.

Fiscal Deficit

This is the term we most often hear in the media. It is simply the shortfall of the Government’s total income against its total expenditure. It is usually financed through borrowing, either from the RBI or from the capital market by issuing instruments like treasury bills and bonds. Since the capital markets have limited funding available, excessive Government borrowing from the market not only weakens the financial health of the country but also crowds out the market for private-sector borrowing. In Budget 2019, the FM had proposed issuing overseas bonds to finance its fiscal deficit by tapping the global markets. That plan, however, had to be put on the backburner mostly because of the domestic slowdown and perceived forex risks with a weakening rupee.

Primary Deficit

            It is simply the Fiscal Deficit minus interest payments.

Final word

So there we have it. The above terminologies will help you in understanding the Government’s accounts in a better manner. An understanding which is important if you are to make sense of the economic condition of the Government and by extension, the country. So, the next time the Budget rolls around in February 2020, try to cut through the rhetoric in the Parliament and have a glance at the Government’s accounts to find out the real state of the union.

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