India’s over-spending

This is the latest piece in Mint (by myself and Rajeev Mantri)

India’s road to fiscal ruin
The government’s bacchanalian populism has resulted in the destruction of public finances

“My appetite is infinite and my greed is more.”

These words were uttered not by a banker or CEO from the top 1% of the income pyramid, but by finance minister Pranab Mukherjee. He was exhorting his officials to ramp up tax collection, according to a June report by the Press Trust of India. His government’s addiction to ever-increasing spending is decimating the nation’s balance sheet. India now is on the dangerous trajectory of persistently high inflation, increasing taxes and slowing growth.

The combined central and state receipts in 2004-05 were around Rs. 5.87 trillion , whereas those for 2009-10 are nearly twice as much at Rs. 11.83 trillion. Yet government spending has more than doubled from Rs. 8.34 trillion to Rs18.30 trillion. The Union government is more at fault here because while its earmarked share of total receipts grew more slowly, central spending actually increased faster.

As a share of gross domestic product (GDP), net central taxes under the United Progressive Alliance has hovered around 7% whereas the state’s revenues (through grants and local revenues) has been around 8% – for a combined tax-to-GDP ratio of 15%. But combined spending has gone from around a fifth to a fourth of the economy, resulting in a consolidated deficit of around 10%.

Fertilizer subsidies have more than tripled from Rs. 16,000 crore to Rs. 52,000 crore. Pension and other retirement benefits increased from Rs. 55,000 crore to Rs.132,000 crore. Yet annual disinvestment increased haphazardly from Rs.17,000 crore in 2003-04 to just Rs. 26,000 crore in 2009-10, despite rapid development of the capital markets and the capacity of the private sector to absorb state assets over this period.

In the midst of this runaway spending, there is only one major sector where allocations haven’t increased much – defence services. Expenditure went up from…

For more, read here

Errata: Defense numbers should be Rs. 76,000 cr to Rs. 136,000 cr.

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