Think of it from a lower middle-class household’s perspective. On the one hand, it has two earning members. On the other hand, there are day-to-day expenses, school-going children and a home loan. A scooter, a new fridge, more clothes would be nice. As would be funding the education of their house help’s two daughters. But there’s hardly a surplus.
That’s pretty much the government’s predicament. On the income side, of every ₹100 it earned in 2023-24, about ₹62 came from taxes, which it can increase only so much. Another ₹32.3 came from loans, where it is already stretched. The balance ₹6.7 came from the companies it owns. It can sell those assets, but those are relatively modest one-time gains and those assets will run out.
On the expenditure side, of every ₹100, as much as ₹51.5 is already claimed—by states as their share of tax revenues, by borrowers and by expenses it can’t cut back on. Technically, the remaining ₹48.5 is available to it, but there are so many committed expenses in critical areas like education, rural development and defence. Its hands are tied.
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Income: With Limits
Let’s dive into each of those sides in some detail. Can the government not dramatically increase its tax revenues, which is 62% of its revenue flow? It can’t. Broadly, there are two categories of taxes.
The first category is direct taxes, which are paid on income earned. Thus, companies pay corporate tax and individuals pay income tax. Increasing tax rates is one option, but this will be unpopular and spur financial engineering to save taxes. The other option is to increase the number of taxpayers. But India is an inherently poor country. As per the government’s 2022-23 consumption data, on average, 95% households spent less than ₹21,000 per month in urban areas (or ₹2.5 lakh per year) and ₹10,501 in rural areas (or ₹1.26 lakh per year). That limits the scope of increasing the number of taxpayers from the current 80 million.
The second category of taxes is indirect taxes. This is what everyone pays when they buy soap or fuel or an airline ticket. This is where the ubiquitous GST (goods and services tax) sits. In general, direct taxes are a better form of taxation, as indirect taxes like GST don’t discriminate between the rich and the poor. In 2023-24, direct taxes accounted for about 57% of total tax revenues and indirect taxes 43%.
Raising more revenues from indirect taxes has its own challenges. Once again, raising rates will be unpopular and reduce consumption. The government has been trying to bring more of the informal economy within the GST ambit, and it has made gains, but such upsides will be limited. Thus, the best-case scenario remains for the economy to grow fast, boost the incomes of households and companies, result in more spending and capacity creation, and lead to higher tax collections.
Also Read: Income tax cuts in Budget are a half-hearted recipe to fix India’s consumption woes
Expenditure: Without Limits
Given the low and limited tax base, it’s crucial for the Centre to tap non-tax sources of income. This is principally the sale of companies owned by it. While its stated position has been to exit sectors where it is no longer required in a shepherding role, it has slowed down on that front. Thus, its share of non-tax revenues has dropped from about 13% in 2013-14 to 7% in 2023-24.
Still, a pop there won’t fill the gap between tax revenues and total expenses. That gap is principally filled by borrowing— ₹17.6 trillion in 2023-24, or about one-third of the budget. It has to borrow big, such are the demands of a big government and a developing economy.
But as seen in chart 1, paying interest, and other such non-negotiables, eats up nearly half its budget. That leaves it with less to spend in sectors that matter—for example, education, health and urban development—and even less to pursue a big idea.
Borrowing per se is not bad. The purpose behind it matters. Borrowing to cover current expenses is a bad idea. It’s another thing to borrow to create productive capacity like better schools, more hospitals and infrastructure, which in turn enables people to get better jobs and earn more.
The gap between own revenues and total spending is referred to as the fiscal deficit. And nearly half of this is accounted for by revenue deficit (which is essentially the shortfall in running expenses). That leaves less space to create for the future. And it adds to interest burden. That is why, fund-wise, the Centre can’t go big in the budget. What it can do is give a sense of its economic thinking, the execution of which is a round-the-term exercise—though also constrained by funds.
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