Budget 2024 Primer – What the Rupee goes towards?

8 Jan 2024 , 09:17 AM

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. 

• Voted Expenditure versus Charged  Expenditure is the first classification of expenditure. What exactly does this mean? Expenditure that has to be specifically authorised by the Parliament is called Voted Expenditure. On the other hand, the expenditure that is automatically debited from the Consolidated Fund of India is generally referred to as Charged Expenditure. Generally, most of the expenditure that is a part of the budget announcements are voted expenditure. For example, expenditure in areas like education, health, sanitation, infrastructure; are all examples of voted expenditure. However, there are some expenditure that are charged and are independent of government’s authorisation or voting. These include are interest payments, and specific expenditure like salaries of the President, Lok Sabha speaker, etc.

   

• The second is the outlay classification which is how the expenditure is classified in the “Budget at a Glance” document. Here, the major heads of expenditure in terms of weightage of allocation are state’s share of taxes, interest payments, central government schemes, finance commission transfers, centrally sponsored schemes, defence, pensions, subsidies, and other expenditures.

   

• The third classification is based on a ministry wise classification. Here again, if you look at the government spending in terms of allocation to various ministries; the pecking order would be as under. It will include Defence Ministry, Agriculture Ministry, Consumer Affairs Ministry, Rural Development Ministry, HRD Ministry, Roat Transport & Highways Ministry, Health & Family Welfare, Housing & Urban Affairs, and the Women & Child Development ministry in that order.

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:

1. Let us start with state share in central taxes. Under the federal constitution, the central government has to mandatorily share part of the taxes collected with the States, since that is where most of the economic activity originates. However, the state share in central taxes is not a part of the Consolidated Fund of India or the Union Budget. This amount is kept outside the Consolidated Fund of India and shared with the Sates before the Union Budget is decided every year.  The formula is agreed between the centre and the states.

    

2. Interest Payments includes all the interest that is paid by the central government on dated government securities, treasury bills, small savings collection, State provident funds and insurance and pension funds. This is a fixed liability of the central government and normally accounts for about 20% of the total expenditure outlay each year.

    

3. The expenditure on Central Sector Schemes includes the costs that are incurred on schemes that are financed fully by the Central Government. The Pradhan Mantri Kisan Samman Nidhi (PM-Kisan), Urea Subsidy, North East Special Infrastructure Development Scheme (NESIDS), Scholarship for College and University students, Pradhan Mantri Swasthya Suraksha Yojana, Prime Minister Employment Generation Programme (PMEGP); are some of the schemes of the central government.

    

4. Apart from the schemes that are directly funded by the government, there are also some centrally sponsored schemes which get funding both from the central government and also the state government. Some of the schemes where the central government is a joint contributor include the Mahatma Gandhi National Rural Employment Guarantee Programme (MREGA), Green Revolution, Pradhan Mantri Krishi Sinchai Yojana, Pradhan Mantri Gram Sadak Yojna, Swachh Bharat Mission, National Health Mission, etc.

    

5. Finance Commission Transfers are also made by the centre to the states; other than the state share of central taxes. The finance commission is constituted every five years, and this commission normally makes recommendations to the central government on the sharing of resources between the centre and the states. This head refers specifically to the transfer made to various states purely based on the recommendations of the Finance Commission only.

    

6. Defence spending does not need too much of an explanation. The defence spending is totally under the central government purview and the as part of national security, the government needs to constantly investing in upgrading the defence infrastructure and buying the latest state-of-the-art defence equipment. The recent purchase of Rafale fighter planes from France is one such example of an order that runs into billions of dollars. This includes expenditure incurred on the Army, Navy, and Air Force. It also includes the expenditure on miscellaneous services like the Rashtriya Rifles, J&K Light Infantry, Coast Guard etc. This includes all expenditure other than defence pensions. The defence pensions are calculated separately under the allocation for pensions.

    

7. Pensions to retired government personnel is a major header of cost for the central government. This includes the provision for pensions and other retirement benefits to the retired personnel belonging to the Defence Services and other civil departments. This includes the funds for the medical treatment of central government health schemes (CGHS) pensioners. 

    

8. A very important header of expenditure is Subsidies, which are called support for merit spending. Some of the major heads are food subsidy to stabilize food prices via fair price shops; fertilizer subsidies to make the Indian subsidy maker competitive and to reduce the cost to the former; fuel subsidies to keep petrol and diesel affordable and interest subsidies on specific loans with larger social goals. 

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.