Where Does Our Money Go?

A Deep Dive on the Finances of India

While you are busy chasing the tax return deadlines and being a compliant citizen,

aren’t you curious about the deployment of these funds – where do they go? It is our taxes that are used for building the nation. Just like you plan your budget, so does the Union Government. As a citizen of this country, we feel it is important for everyone to know the sources of funds and for what causes it is spent. As a citizen of this country, we feel it is important for everyone to know the sources of funds and for what causes it is spent.

Bringing the Bacon Home

The Government budgets to collect receipts worth Rs.22,45,900 crores(TWENTY-TWO LAKH CRORES+) in 2020*. This humungous sum equates to roughly Rs.16,600 crores per person in India!

How do you think the government makes most of its bucks? TAXES!

Employees are taxed on their salaries while businesses pay taxes on profits. This is called direct tax. These taxes are paid annually by the tax-payers.

On the other hand, Indirect taxes (GST rings a bell?) are levied at the time of purchase. The tooth-paste you use, the pizza you eat, the car you drive and the shirt you wear are all taxed. These taxes are added to the invoice at the time of purchase for the consumer and passed to the government by the seller.

Footing the Bill

You might feel spending twenty-two lakh crores must be a tall task and the government’s vault should be filled with unutilized funds.

Well, well, well……… the budgeted expenditure far exceeds the receipts. The government has budgeted to spend Rs.30,42,200 crores in 2020. (THIRTY LAKH CRORES+)

Why is the expenditure so high you ask?

32% of the govt. inflows is spent on interest payments on loans, 10% on subsidies (given on food, fertilizer, oil etc), 26% for paying for salaries & pensions, accounting for an aggregate of ~70%.

Notably, the government has budgeted mere Rs.63,900 crores towards health and family welfare and this is not only below what developed countries would spend on healthcare but also stands worst amongst the BRICS (Brazil, Russia, India, China, South Africa) nations.

A Light Purse is a Heavy Curse

As you can see from the exhibit on left, our budgeted expenditure exceeds the budgeted receipts, and this leads to a deficit (~8,00,000 crores rupees in 2020 alone). Spending more than you earn or simply put a deficit is possible by taking debt. India too knocks on the doors of institutions for borrowing money.

For countries, spending more than the inflows is a very usual affair and this leads to deficits. Such deficits are measured as a % of respective GDP (GDP is the sum of all goods and services produced in a country and is the most prominent barometer of economic prosperity).

India expects to run a deficit at 3.5% of its GDP in 2020*. This is much better than the historical deficits it has run.

Most countries run a fiscal deficit. Did you know that Saudi Arabia despite being oil-rich, runs a fiscal deficit at ~9%? India’s fiscal deficit is relative better than even that of USA!

Running deficits means taking more debt. A country with debt is not an issue till the time it is manageable to repay it in the future.

Economics track the reasonableness of debt by using debt-to-GDP ratio. India’s current debt-to-GDP ratio is ~70% which is better when compared to other countries like USA (107%), Canada (90%), UK (81%) and Brazil (76%).

So, what have we learned today?

- India spends more than it earns and thus runs a fiscal deficit. In fact, major countries in the world do it

- Taxes contribute to 70% of the government funds

- Interest on loans is the biggest expense item for the government (32% of inflows)!

- India’s expenditure on healthcare at just 3% of inflows, which is very low when compared to other countries.

- India’s outstanding debt levels are comfortable (debt-to-GDP ratio at ~70%) v/s other countries.

- File your taxes honestly and on time. (Nah…..you knew this already)

*Disclaimer: - These estimates were made pre-Covid. It is highly likely that deficits will worsen (due to declining revenue receipts caused by decline in economic activity); thereby leading to adverse debt ratios.