Tuesday, 17 January 2017

Indian Economy : A Question of Revenue

Indian Economy : A Question of Revenue

Source Data for this article is from a LiveMint article of today, link given at the end of this article

LiveMint today has carried an excellent article on The Indian Economy vis-à-vis the global economy, comparing our Fiscal Deficit, Revenue-to-GDP,      Government Expenditure-to-GDP, Gross Debt-to-GDP ratios with the G-20 group of nations. The Group of Twenty (G20) is an international forum that brings together the world's leading industrialised and emerging economies. The group accounts for 85 per cent of world GDP and two-thirds of its population. That is what makes the comparison a stroke of genius, as it immediately benchmarks us against all the relevant nations – {Definition From Telegraph.co.uk}.

1) General Government Overall Balance / GDP %

2) India's Government Revenue / GDP in %

3) General Government Expenditure / GDP in %

4) General Government Gross Debt / GDP in %

What emerges is a most interesting situation – our Fiscal Deficit is indeed among the highest in these nations; the Expenditure and Debt charts also show a similar trend, But, and this is interesting, the revenue chart shows us around middle of the group. The article also states, and I quote : “Yet, in spite of lower expenditure, these countries mostly have higher levels of social welfare indicators than India. That would seem to indicate that our expenditure is wasteful and not targeted well…

A few clear points emerge from this interesting comparison – particularly our Expenditure Pattern & heads, implementation culture and inadequate revenues. Let us look at the Expenditure aspects first in a short note. From the italicized segment in the above paragraph, it is evident that we have higher expenses than others, more so as we are not doing too great on Social Development indices. How can you prune your expenses – under what heads? Subsidies? Which do you prune, and how much as a %age of GDP can you save from that exercise? Is it plolitically, socially implementable?

The major subsidy bills of the Indian Economy are courtesy Food Security, MNERGA, Fertilizer and Oil. A simple reading of this list tells us that while rationalization & proper utilization of funds, controlling leakage can be done in these areas – the scope for pruning does not inspire much hope. The rural sector, with its turbulent past few years as well as the ground reality in terms of current income levels means that you will have to provide support to these areas. Neither is there much scope for tinkering with the respective allocations provided to these segments, as we saw in the preceding budgets of NDA2 and the impact It created. Here we run into a dead wall. Furthermore, as an amateur economist I am not too convinced controlling the Fiscal Deficit beyond a certain level is healthy; emerging economies require infusion of funds to realize their potential...

As far as cutting waste is concerned, that is firstly a long-term project, requiring complete digitization {which is admittedly underway as far as I am aware} since identifying the leakages is a matter of records and investigation. Second, corruption is also a serious matter  of contemplation, making achievable targets in this area a tough ask. Furthermore, given the the political problems associated with excess flab in government as well as other issues, you cannot realistically expect genuine fast action on that parameter; this area will take time, to be honest.

The second aspect that jumps at you is our implementation culture : if we are spending among the highest, if our expenditure has a clear and high social sector component, and if then we have social indices among the worst in the world, then this is an area of serious concern. It straightaway means that either we are spending in the wrong areas, or that there is high leakage – or both. I don’t think that there can be much doubt that the issue is simpy – both.

The scepter of corruption is too well known  to us now; add to this the lack of adequate support to education and health – and it adds up to the scenario we see today. Again, this is ciomplex; both education and health are on the concurrent list of the Indian Constitution – meaning that they can be legislated on by both the states as well as the center. Second, given the rampant around us, there is a felt and dire need for social support as well, making prioritizing expenses a tall task, and a proper examination of this a subject unto itself!

This brings us to what is perhaps the only realistic way forward – Revenue. Our revenue is middle of the road in comparison to other economies- meaning we are not getting maximum bang for the investments we are putting into our nation. The question then arises – how can we increase the revenue we generate? It isn’t a simple matter of Make In India alone; the internal combustion engine also has to generate adequate demand to absorb the increased production! And here, in my observation, no one in India is even asking this question, including the Pink Media – which focus on Plan and non-Plan Expenditure. Subsidies, Fiscal Deficit and what-not. To me, the most important question should be- how do we generate revenue?

Generation of revenue requires an increase in the level of economic activity. Sample the developed nations in the world : which have far higher revenue-to-gdp ratios. That tells us the full story – development isn’t a matter of infrastructure or other such issues; these are the factors that go into development. The only true barometer can be a full macro-economic analysis, including the revenue parameter. For, a higher ratio of revenue to GDP simply implies a higher level of economic activity, a far higher rate of revenue-generating transactions taking place

picture 1e

A nation earns revenue through various means : Tax, Non-Tax and Capital Receipts. That again tells us one thing – {sample chart for 13-14 above} you have to grow the Tax portion, for Non-Tax revenues include interest, dividends, profits, social services earnings etc. Capital Receipts can logically only be an additional source – for a receipt has to paid back. The level of economic activity determines the tax revenues – which are direct plus indirect taxes. And unless the base –the number of taxable transactions increase – you cannot grow revenue.

That brings us full circle – we can see one effort of the Govt in increasing Tax Revenue, in increasing the taxable  base. The need for increasing revenues is why we need to control corruption; large numbers of untaxed transactions mean a loss for the nation. The second aspect is what has not been properly highlighted, being limited to only Make In India. MII along will  never be sufficient; it has to be a wholesome package basis the Indian Economic Realities on the ground… this forms the second part on this analysis, wherein I look at the steps that can be taken…


  1. I liked your article trashing comparisons between post war Japan and 1947 India; I would, however, like you to share your thoughts on a more pertinent case: South Korea. Most analyses on the differing trajectories of SK and India focus on the Marshall plan; I've always been a bit skeptical about this, so I'm hoping you can clarify the matter.

    Additionally, I'm exceedingly worried by the disparity in education budgets between India and every country that has "made it" in the last 60-70 years. Consider SK again, their education budget is about 20%(!) of their national budget, compare that to our paltry 4%.

    Abhishek Cherath.

    1. Excellent points, Abhishek! I will need to study SK a bit, let me confess. You have given me ideas for further reading...

      On education, I must share your discomfiture. Agreed that Education is on the concurrent list. Even so, a lot more can be done. And now, with greater devolution of revenues to the states, there is a need to evolve a common strategy of priorities with them, along the lines of the FRBM. Maybe something similar can be thought of for Education and Health, by setting up proper goals and priorities shared by all. This of course is an off-the-cuff suggestion; it will need to be tempered by constitutional expertise and Center-State Relations realities. But something along these lines, and within the framework of the laws, needs to be worked out. Perhaps I will pen something on this!