Where does all the tax money go?
You must be wondering; where does all the taxes collected from you actually go. The government has a lot to spend on. It has to spend on defence, internal security, salaries to government employees, pensions to retired employees, interest on loans taken, subsidies to deserving sectors etc. All these cost a lot of money. Now, the central government does not get to spend all the money. Much of the money has to also be shared with the stated and union territories in the form of grants as well as the state’s share in taxes. How do you think the huge infrastructure projects take off and how does the rural employment guarantee scheme run. These are all funded by the government. Just like the central government has capital and revenue receipts; it also has capital and revenue expenditure. These are shown separately and we shall look at the detailed classification later on.
How is government expenditure categorized?
Broadly, the central government expenditure is classified in 3 different ways. Here we will not talk about the standard classification of revenue and capital expenditure, because that is already well known. We will focus on 3 finer categorizations of expenditure.
The most popular way of classifying expenditure is based on the Budget at a Glance document as it is a comprehensive and also simple way to classify the budget spending.
Expenditure – Actuals, Budget estimates and revised estimates
When you talk about what the rupee goes towards, you must be familiar with three things here also. The budget presents the actual numbers of last financial year, budget estimates & revised estimates for the ongoing year and the budget estimates for the upcoming financial year. Let us first look at the macro view of government expenditure in the table below.
A. Centre’s Expenditure |
Actuals Numbers |
Budget Estimates |
Revised Estimates |
Budget Estimates |
FY21-22 |
FY22-23 |
FY22-23 |
FY23-24 |
|
I Establishment Expenditure |
6,93,272 |
6,92,214 |
7,34,619 |
7,44,339 |
II Central Sector Schemes/Projects |
12,09,950 |
11,81,084 |
14,11,729 |
14,67,880 |
III Other Central Sector Expenditure |
10,10,747 |
11,32,813 |
11,36,588 |
13,01,542 |
of which Interest Payments |
8,05,499 |
9,40,651 |
9,40,651 |
10,79,971 |
B. Transfers |
0 |
0 |
0 |
0 |
IV Centrally Sponsored Schemes |
4,54,366 |
4,42,781 |
4,51,901 |
4,76,105 |
V Finance Commission Grants |
2,07,435 |
1,92,108 |
1,73,257 |
1,65,480 |
VI Other Grants/Loans/Transfers |
2,18,031 |
3,03,908 |
2,79,138 |
3,47,752 |
Grand Total |
37,93,801 |
39,44,909 |
41,87,232 |
45,03,097 |
Data Source: Ministry of Finance (All figures are ₹ in crore)
The above table represents the actual budget numbers as presented in the February 2023 Union Budget for the financial year 2023-24. Out of the Rs45.03 trillion that the government proposed to spend in FY24, the table above provides the break-up across various central government schemes, sponsored schemes, central government costs, finance commission grants etc. This is a macro picture and does tell you much about the specific heads of expenditure. Nearly a fourth of the government expenditure budget goes towards payment of interest on the loans taken. We will look at the granular classification in the third part, but for now let us quickly look at the capital expenditure part.
Items of Capital Spending |
Actuals Numbers |
Budget Estimates |
Revised Estimates |
Budget Estimates |
FY21-22 |
FY22-23 |
FY22-23 |
FY23-24 |
|
Capital Expenditure |
5,92,874 |
7,50,246 |
7,28,274 |
10,00,961 |
Grants in Aid for creation of capital assets |
2,42,646 |
3,17,643 |
3,25,588 |
3,69,988 |
Total |
8,35,520 |
10,67,889 |
10,53,862 |
13,70,949 |
Data Source: Ministry of Finance (All figures are ₹ in crore)
What stands out above the table is the break up of the capital expenditure allocation. of the central government. Out of the total expenditure budget of Rs45.03 trillion, Rs13.71 trillion goes towards capex spending while the balance goes towards revenue spending. The capital expenditure has grown sharply in the last 2 years and that is specifically an initiative of the government to kickstart the capital cycle revival in India in the aftermath of the pandemic. The government has been taking the lead and in the midst of high levels of fiscal deficit, the government has cut its revenue spending, but kept its capital spending intact. That has been one of main reasons for the robust growth that India has seen in GDP, IIP and the core infrastructure sectors. Let us finally turn to the itemized break-up of government spending.
Heads of Expenditure |
Actuals Numbers |
Budget Estimates |
Revised Estimates |
Budget Estimates |
FY21-22 |
FY22-23 |
FY22-23 |
FY23-24 |
|
Pension |
1,98,946 |
2,07,132 |
2,44,780 |
2,34,359 |
Defence |
3,66,546 |
3,85,370 |
4,09,500 |
4,32,720 |
Subsidy – |
0 |
0 |
0 |
0 |
Fertiliser |
1,53,758 |
1,05,222 |
2,25,220 |
1,75,100 |
Food |
2,88,969 |
2,06,831 |
2,87,194 |
1,97,350 |
Petroleum |
3,423 |
5,813 |
9,171 |
2,257 |
Agriculture and Allied Activities (Excluding PM-KISAN) |
76,492 |
83,521 |
76,279 |
84,214 |
PM-KISAN* |
66,825 |
68,000 |
60,000 |
60,000 |
Commerce and Industry |
47,068 |
53,116 |
37,540 |
48,169 |
Development of North East |
2,653 |
2,800 |
2,755 |
5,892 |
Education |
80,352 |
1,04,278 |
99,881 |
1,12,899 |
Energy |
53,696 |
49,220 |
70,936 |
94,915 |
External Affairs |
14,146 |
17,250 |
16,973 |
18,050 |
Finance |
57,364 |
21,354 |
17,908 |
13,574 |
Health |
84,091 |
86,606 |
77,351 |
88,956 |
Home Affairs |
1,12,301 |
1,27,020 |
1,24,872 |
1,34,917 |
Interest |
8,05,499 |
9,40,651 |
9,40,651 |
10,79,971 |
IT and Telecom |
25,053 |
79,887 |
74,106 |
93,478 |
Others |
1,08,447 |
1,13,301 |
1,08,102 |
1,20,524 |
Planning and Statistics |
3,753 |
5,720 |
6,209 |
6,268 |
Rural Development |
2,28,760 |
2,06,293 |
2,43,317 |
2,38,204 |
Scientific Departments |
27,772 |
30,571 |
25,626 |
32,225 |
Social Welfare |
40,595 |
51,780 |
46,502 |
55,080 |
Tax Administration |
1,77,144 |
1,71,677 |
1,77,343 |
1,94,749 |
of which Transfer to |
0 |
0 |
0 |
0 |
GST Compensation Fund |
1,10,795 |
1,20,000 |
1,30,000 |
1,45,000 |
Transfer to States |
2,74,580 |
3,34,339 |
2,70,936 |
3,24,641 |
Transport |
3,32,238 |
3,51,851 |
3,90,496 |
5,17,034 |
Union Territories |
56,490 |
58,757 |
69,040 |
61,118 |
Urban Development |
1,06,840 |
76,549 |
74,546 |
76,432 |
Grand Total |
37,93,801 |
39,44,909 |
41,87,232 |
45,03,097 |
Data Source: Ministry of Finance (All figures are ₹ in crore)
The above list is a more itemized break-up of the expenditure of the government of India a per the last budget presented in February 2023. Interest remains the biggest item of expenditure in the latest budget followed by transportation and Defence in that order. The overall expenditure of Rs45.03 trillion for FY24 is, obviously, a mix of revenue spending and capital spending, arranged outlay header wise.
Explaining the items of Expenditure of the central government
Having seen a practical example of how the capital expenditure and the revenue expenditure look like, let us turn to what various headers actually mean.
Here are some key components of the overall expenditure basket and their explanation:
On one side you have the receipts and then you have all the above expenditure as stated above. The net gap is called the Budget deficit or the fiscal deficit; which has to be funded through borrowings. India has run persistent deficits on the budget due to huge spending on interest costs, government administration, subsidies, and defence. As a welfare state, the government does not have much of a choice. Things will improve as revenues increase in line with economic activity, but that would happen more over the longer term.
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