Briefly discusses the reasons for chronic government budget deficits in India

1. The Mirage of Plenty:
Government Finances in India
Shantanu Basu

2. “We must consult our means
rather than our wishes.”
George Washington

4. Union Government Finances in the Constitution
Budget &
Finance
Art. 53(1)
Art. 78
Art. 109-
117
Art. 134-
135
Art. 160-
175 (excl.
167)
Art. 243-I
& J

5. State Government Finances in the Constitution
Budget
&
Finance
Art.
134-135
Art. 154
Art.
149-151
Art. 163
Art.
198-200
Art.
202-207
Art. 209
Art.
243:I -J

6. The Budget Roadmap
Field Data Collection & Analysis
Internal & External Consultation
Draft budget proposals & Cabinet/Ministerial
approval obtained
Ministry & Object wise demands for grants
Legislative Debate & Vote

7. Process of Budget-Making
Field Data Collection &
Analysis and Proposals
Admn. Ministry: Review &
Consolidation of Proposals
Finance Ministry: Review &
Final Consolidation
Prime Minister & President:
Cabinet Approval
Parliament: Debate & Vote

8. The Three Major Categories in Government Budgets

9. Common Constraints in Development & Non-
Development Budgets

11. Inflation Rates in India: 2012-16
India Inflation Rate: extracted on Feb. 8, 2017 from http://www.tradingeconomics.com/india/inflation-cpi

12. Declining Value of Indian Rupee 1947-2014
www.forecast-chart.comusd-indianrupee.html

13. Declining Value of Development Money: 1990-2008
Shantanu Basu: Where's the money for development? Business Standard Feb. 25, 2010 extracted
on Feb. 8, 2017 from http://www.business-standard.com/article/opinion/shantanu-basu-where-s-
the-money-for-development-110022500021_1.html
Rs. 6.85 lakh crore •1990-91
Rs. 3.20 lakh crore •2007-08
Rs. 2.88 lakh crore •Soc & Comm. Services
Rs. 1.34 lakh crore •2007-08
Rs. 2/head/day

15. Sources of Govt. Revenue: BE 2014-15
Ministry of Finance: Public Finance Statistics 2014-15, extracted on Feb.
8, 2017 from http://finmin.nic.in/reports/IPFStat201415.pdf Table 1.1 (B)
56%
28%
12%
4%
Indirect Taxes Direct Taxes Non-tax Revenue Others

16. Revenue & Expenditure Patterns: 2008-09 to 2014-15
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Deficit Total Expenditure Total Revenue
Ministry of Finance: Public Finance Statistics 2014-15, extracted on Feb.
8, 2017 from http://finmin.nic.in/reports/IPFStat201415.pdf Table 1.1 (B)

17. Highest Budget Deficit Nations in the World 2016
World Bank: Budget Deficit By Country As Percentage Of GDP , World Atlas, extracted on
Feb 15, 2017 from http://www.worldatlas.com/articles/the-largest-deficits-in-the-world.html

18. Sample Budget Deficits in the World 2016 (est.)
Central Intelligence Agency: The World Factbook extracted on Feb. 15, 2017 from
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2222rank.html
Singapore 0.70
Germany 0.60
Switzerland 0.40
South Korea 1.20
Netherlands 1.40
Australia 2.10
Indonesia 2.40
Thailand 2.60
USA 2.90
Myanmar 3.00
South Africa 3.50
India 3.70
PR China 3.80
Russia 4.00
Greece 4.50
UAE 6.10
Qatar 7.80
Saudi Arabia 13.90
Venezuela 39.90

19. National Government Indebtedness 2016 (est.)
Debt: GDP Ratio (%)
Central Intelligence Agency: The World Factbook extracted on Feb. 15, 2017 from
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2222rank.html
& Ministry of Finance: Govt. Debt Status Paper, Govt. of India, Jan., 2016 extracted on
Feb. 15, 2017 from http://finmin.nic.in/reports/govt_debt_status_paper_2016.pdf, p. 6
Australia 101.29
United Kingdom 265.01
France 206.32
Germany 141.13
Greece 193.39
Ireland 183.78
Italy 130.42
Portugal 134.58
Spain 116.31
India 66.67

20. Financing the Deficit: 2014-15
Ministry of Finance: Public Finance Statistics 2014-15, extracted on Feb.
8, 2017 from http://finmin.nic.in/reports/IPFStat201415.pdf Table 1.1 (B)
Revenue
Deficit
Rs. 884912 crore
Domestic
Borrowing
Rs. 865076 crore Incl. market loans of Rs.
681896 crore &
Disinvestment Rs. 55814
crore
External
Borrowing
Rs. 8138 crore
Residual
deficit
Rs. 11697 crore Remained uncovered

21. Revenue Generation Fetish
Revenue
generation
High
consumer
costs
Low capital
and O&M
investment
Disincentive
for
expansion &
competition
Larger
Cartels

22. Debt Profile of Government of India: BE 2015-16
81%
6%
13%
Internal Debt External Debt Public Account
Total: Rs. 64,94,889 crore
Ministry of Finance: Govt. Debt Status Paper, Govt. of India, Jan., 2016 extracted on Feb. 15, 2017
from http://finmin.nic.in/reports/govt_debt_status_paper_2016.pdf , Table 1.2, p. 3

23. Debt Profile of States: 2014-15
Total: Rs. 143,23,190 crore
Ministry of Finance: Govt. Debt Status Paper, Govt. of India, Jan., 2016 extracted on Feb. 15, 2017 from
http://finmin.nic.in/reports/govt_debt_status_paper_2016.pdf , p. 6
0
100000
200000
300000
400000
500000
600000
700000
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

24. The Development & Non-Development
Factors in Budgets BE 2014-15
47%
53%
Non-Development Development

25. Pre-Budget 2017-18: Complex Structure Explained
Budget
Plan
Revenue
Asset &
Liability
Capital
Asset &
Liability
Non-Plan
Revenue
Asset &
Liability
Capital
Asset &
Liability

26. The Budget 2017-18 Structure Simplified

27. Classification of Government Expenditure
Development (Plan) Non-Development (non-Plan)
Railways Defense Services
P&T Border Roads
Social & Community Services Fiscal Services
General Economic Services Administrative Services
Agriculture & Allied Services Organs of State
Industry & Minerals Pension, etc.
Fertilizer Subsidy Disaster Relief & Mitigation
Power, Irrigation & Flood Control Intl. Technical & Economic Cooperation
Transport & Communications Compensation to Local Bodies
Public Works Food Subsidy
Social Security
Others

28. Distribution of Government Expenditure:
Non-Development: 2014-15
2%
42%
3%
34%
9%
4%
6%
Defense & Border Roads
Interest
Fiscal Services
Administration, Organs of
State & Pensions
Food Subsidy
Urban Local Bodies
Others

29. Distribution of Government Expenditure:
Development: 2014-15
2%
48%
4%
20%
4%
22%
Railways and P&T
Social & Community
Services
General Economic
Services
Agriculture & Industry

30. The Curious Case of J &K: 2010-11 to 2014-15
Area under Indian occupation (sq. km) 106567
Population (Census 2011) 12.50 million
No. of districts 16
Total expenditure via State Budget Rs. 155785.36 crore
Avg. expenditure per sq. km @ 75% of total land
area of State
Rs. 190-195 crore
Avg. expenditure/district/annum for 16 districts Rs. 1947 crore
Avg. expenditure/head/annum of population Rs. 2.50 lakh
Total own revenue earned by state Rs. 55821.66 crore
Avg. own revenue earned by the state/head of
population (incl. state’s share of central taxes)
Rs. 44657
Total grants received by State from Govt. of
India
Rs. 73478 crore
Avg. grants-in-aid/head of population received
by J&K from Govt. of India
Rs. 587824
Avg. annual ratio between State’s own revenue
and grants-in-aid from Govt. of India
1: 1.31

31. Stagnation of Taxes in Real Terms
0
5
10
15
20
25
30
2000-01 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Tax-GDP Ratio
Central Taxes
State Taxes
Total Expenditure net of lending as %age of
GDP

32. Establishment: A Major Source of Revenue Expenditure
Top heavy
Long 3C
chains
Diffused
responsibility
Slow
implementation
High recurring
costs
18 Ministries in 1947
55 Ministries and 46
Departments in 2008

34. Losses
Over-
invoicing
Under/Fictitious
Completion
Improper stock
verification
Faulty
Planning
Fictitious
Establishment
Delayed
Implementation
Under-realization of
Revenue

35. Illustrations of Losses- I
Design or selection of uneconomical projects because
of opportunities for financial kickbacks and political
patronage, e.g. realigning rail track to inflate cost
Procurement fraud, including collusion, overcharging,
or the selection of contractors, suppliers, and
consultants on criteria other than the lowest evaluated
substantially responsive bidder, e.g. tendering,
cartelization & pre-qualification of vendors
Illicit payments of "speed money" to government
officials to facilitate the timely delivery of goods and
services to which the public is rightfully entitled, such as
permits and licenses, e.g. transport permits

36. Illicit payments to government officials to facilitate access to
goods, services, and/or information to which the public is not
entitled, or to deny the public access to goods and services to
which it is legally entitled, e.g. fire clearances & change of land
use
Illicit payments to prevent the application of rules and
regulations in a fair and consistent manner, particularly in areas
concerning public safety, law enforcement, or revenue collection,
e.g. hafta & income tax refund advice
Payments to government officials to foster or sustain
monopolistic or oligopolistic access to markets in the absence of
a compelling economic rationale for such restrictions, e.g.
limiting construction of new airports
Illustrations of Losses- II

37. Illustrations of Losses- III
Misappropriation of confidential information for personal
gain, such as using knowledge about public transportation
routings to invest in real estate that is likely to appreciate, e.g.
extension of DMRC, location of SEZ & national highway
realignment
Deliberate disclosure of false or misleading information on
the financial status of corporations that would prevent
potential investors from accurately valuing their worth, such as
the failure to disclose large contingent liabilities or the
undervaluing of assets in enterprises slated for privatization,
e.g. valuation of assets prior to disinvestment of PSU
shareholding by GOI
Theft or embezzlement of public property and monies, e.g.
Railway property & preferment of duplicate bills

38. Illustrations of Losses- IV
Sale of official posts, positions, or promotions;
nepotism; or other actions that undermine the creation of
a professional, meritocratic civil service, e.g. State PWD,
Irrigation, senior appointments in Govt. of India
Extortion and the abuse of public office, such as using
the threat of a tax audit or legal sanctions to extract
personal favors, e.g. income tax notice & overstated excise
penalties
Obstruction of justice and interference in the duties of
agencies tasked with detecting, investigating, and
prosecuting illicit behavior, e.g. witness intimidation

39. Contemporary Issues that Plague Public Finances -I
Reticence to
raise taxes
Public
Revenues
limited
PSB banks’
NPAs/CDRs

40. Magnitude of PSB NPAs
Year Ending
Dec 31
Gross NPA
(Rs. in Crore)
GNPA Ratio
(%age)
2012 157784 3.87
2013 218579 4.61
2014 261843 5.09
2015 393047 7.16
2016 614872 11
Five highest GNPAs as on 31/12/2016
Indian Overseas Bank 22.42
UCO Bank 17.18
United Bank of India 15.98
IDBI Bank 15.16
Bank of Maharashtra 15.08
Indian Express: Bad loan crisis continues: 56.4 per cent rise in NPAs of banks extracted on
Feb. 20, 2017 from http://indianexpress.com/article/business/banking-and-finance/bad-loan-
crisis-continues-56-4-per-cent-rise-in-npas-of-banks-rbi-4533685/

41. Goods & Services Tax-I
Pros Cons
Create unified market with lower
logistical costs
18-20% of all indirect taxes will be excluded
while computing the basic GST rate
Dramatically reduce leakage of
revenue and cut down on
corruption
GST rate with ranges of 15-24% being
suggested by the Union and States
Reduce duplication and
compliance costs
Destination-based GST may work to the
disadvantage of major manufacturing states
Automation of compliance
procedures to reduce errors and
increase efficiency
Populous and often averagely administered
states like Bihar would generate higher GST
revenue and become eligible for larger
share of GST revenues from the Centre
Create consolidated supply chains Limited incentive for states to attract
investment, instead promote consumption
Removal of tax at manufacturing
point implies radical changes in
distribution of goods
Govt. of India with its veto power in the
GST Council assumes an unassailable
position in the finances of a state
Improved cash flow and lower
inventory costs
Costs and reliability of automation

42. Goods & Services Tax-II
 Keys to the success or failure of GST is the basic tax rate and
fairness in the distribution of GST revenue.
 India has no social security system, hence bears no comparison to
high rates of up to 25% in some developed countries.
 Australia with a 10% basic GST rate exempts basic foodstuffs,
water, sewerage and drainage services, health, education, religious
and related supplies, child care, supplies of going concerns, and
international transport and mail, etc.
 Likewise, New Zealand with a 15% basic GST rate has generous
social security and health care for its citizens.
 Then, shouldn’t India’s basic GST rate be in the range of 10-12%
without exemptions?

43. Contemporary Issues that Plague Public Finances -II
3% Deficit
Revenue
Expdn.
Low Capital
Formation
Little
accretion to
GDP
QLIs
stagnate

44. Contemporary Issues that Plague Public Finances -III
GDP &
Revenues
Production
InfrastructureJobs
Consumer
Demand

45. State-owned Shareholding in Few Private Sector Companies
Gammon India 63.41%
ACC 14.66%
Monnet Ispat 50.14%
ITC 34.43%
MCX India 21.95%
Tata Global Beverages 13.14%
Infosys 10.79%
L&T 45%
Tata Steel 19.66%
M&M 14.78%
Company State-FI share
Rupees in Crore
ITC 64971
Axis Bank 40326
Maruti Suzuki 10629
Infosys 26692
L&T 28210
ICICI Bank 21801
M&M 13743
RIL 32555
Baja Auto 5911
Bharti Airtel 10481
Yes Bank 6785
Tata Steel 7359

46. How Govt. of India is Raising Revenue
Divestment
GST
Leasing
Resources
Dividend

47. Before Closing
Budget
Spend
Earn