When India’s finance minister, Arun Jaitley rises to present the country’s Union budget on 1 February, he will carry the weight of a billion expectations and a daunting set of challenges. But how much discretionary power does Jaitley and his team of officials have? Not very much in the short run, a Mint analysis of budget numbers suggests.
Most of India’s budget allocations go towards meeting prior commitments the government has made such as on interest payments, salaries, and pensions, leaving limited space for discretionary spending.
Barring exceptional years, spending on subsidies (8-14% of overall Union government expenditure) and on defence (12-15% of overall Union government expenditure) also take up a roughly constant share of the budget pie. These items of expenditure collectively account for a lion’s share of the Union budget.
Thus, the annual budget ritual can be thought of as an exercise in fixing the residual expenditure, with most of the budget almost preordained by history. Allocations for new schemes or new developmental expenditure has to be made keeping in mind the residual scope for spending after taking care of these non-discretionary expenses.
Most of the Union government expenditure is on revenue expenditure, and most of revenue expenditure is non-discretionary in nature. Non-discretionary expenditure accounts for well over 80% of the Union government’s revenue receipts, and is expected to remain above that mark over the next couple of years as well, according to the official projections of the finance ministry.
More than a third of the Centre’s revenue receipts are spent on meeting interest payments alone, the biggest item in the list of non-discretionary expenditure, as the chart above shows. Salaries and pensions together account for roughly 15% of the Union govt.’s revenue receipts, and subsidies account for a similar share as well.
Even as a proportion of the overall Union government expenditure, non-discretionary spending accounts for the lion’s share. As the chart below shows, the finance ministry has very little control over more than half of the total budgetary outlay.
However, the chart also illustrates that the Union government can create fiscal space for itself if it musters the political will to do so. After all, during the first National Democratic Alliance (NDA) regime, the share of non-discretionary spending as a share of overall spending fell nearly 10 percentage points to 55.9% and stayed roughly at the same levels during the early years of the United Progressive Alliance (UPA) regime, before rising considerably during the second innings of the UPA government. At the end of the UPA era, the share of non-discretionary spending was nearly 63%, and it has remained roughly at that level since then.
Jaitley needs to look no further than the Vajpayee era for inspiration, if he wishes to lower the share of routine expenditure, and thereby create fiscal space for new investments and development expenditure. It is, of course, tempting for the government to ignore that legacy and instead increase public debt at a time when growth has slowed and investor sentiment is weak. But doing so will mean adding to an already bloated interest payment bill and constraining the discretionary fiscal space for future budgets. It will also mean risking the ire of credit rating agencies at a time when the government’s salary and pension bill is expected to rise because of the government’s commitments vis-a-vis the Seventh Pay Commission and the one rank one pension (OROP) scheme.
To know which of these paths Jaitley chooses, we have to wait till 1 February, even if we already know how more than half of the government’s budget outlay is going to be allocated.