Dive deep into the government expenditure in India — how public money is allocated between revenue and capital spending, what sectors gain priority, and whether the budget of Indian government is driving sustainable and inclusive growth.
The world’s fourth largest economy, carrying a dream of becoming the third largest in the world by 2030 while dealing with its persistent socio-economic challenges of poverty, unemployment and population pressure (considering India is the world’s most populous country in the world), India stands at the crossroads with its need to plan its expenditure in such a way that it can push the economy in the right direction by providing the right infrastructure and technology and confronting its persistent challenges.
Having looked into the types of taxes and the amount of tax revenue collected by the Indian government, it’s now imperative to understand the budget of Indian government. Understanding the allocated budget is essential not only to determine government priorities but also to critically evaluate whether the planning is goal-oriented and sustainable for the country’s growth. Let’s analyze what is government expenditure and the planned Indian government spending from FY18 to FY24 to understand what the government considers important for the development of the nation.
What is Government Expenditure in India?
Government expenditure is the total amount of Indian government spending used to fulfill its economic and social objectives. It includes spending on government consumption, government investment, and transfer payments. It is of 2 types:
- Revenue Expenditure: The spending done for carrying out the daily operations of the government. These expenses are used for government consumption, such as salaries & interest costs, as well as transfer payments, including pensions, welfare schemes & subsidies.
- Capital Expenditure: Spending on long-term assets, infrastructure creation, and investments that yield benefits beyond the current financial year. These expenses are used for government investment, such as constructing roads and railways, as well as investing in assets.
Budget of Indian Government
Each year, the Government of India presents its financial budget for the upcoming fiscal year, outlining how it plans to allocate the revenue collected from various sources and whether that income will be sufficient to meet its expenditure. The budget not only specifies the amount of funding each sector will receive but also, at a broader level, highlights the government’s priorities and the sectors it considers most crucial for the country’s future growth. From the data below, we can see that over the years, the government has been focusing more on capital expenditure and building infrastructure for the nation’s growth, rather than spending on revenue expenditure, which doesn’t lead to the creation of any assets.
The revenue expenditure of the government, as stated earlier, covers interest payments, pensions, welfare schemes, subsidies, etc. The interest payments are not discretionary expenses. However, they are increasingly constituting a larger portion of total expenditure, increasing from 23% in FY18 to 24% in FY24.
The data indicate a substantial increase in the nation’s debt. Partly fueled by the onset of the pandemic, the debt-to-GDP ratio has risen to more than 55%. The debt-to-GDP ratio is a key parameter that measures the government’s ability to service its debt relative to the size of the economy. Hence, such a high debt-to-GDP ratio for a developing nation shows reduced fiscal flexibility.
However, the majority of the debt being internal is a relief. According to the Receipt Budget FY23-24, ~97% of the debt taken by the Indian government is Internal, and just 3% is External. This makes the nation free from external market vulnerabilities and credit rating fluctuations. This, coupled with the ideology of increasing assets by increasing capital expenditure, is a good plan for long-term sustenance if the asset growth outpaces debt growth.
Sectoral Expenditure
Regarding sectoral allocation, the government’s focus has shifted considerably over the years, as illustrated in the chart below. The chart displays the budget allocation (revenue + capital) for each ministry, showing its trend, and highlighting the government’s vision for the future.
India’s defence budget has declined from about 16.76% of the total expenditure of the government in FY18 to 13.16% in FY24. A whopping 68.8% of this allocation was directed toward salaries and pensions in FY24, brought down from 71.84% in FY18. The government has been trying to reduce the revenue expenditure through schemes like Agnipath. This recruitment scheme aimed to keep shorter tenure, lower compensation packages, and eliminate pension benefits for new entrants, which might have led to a budget decline. The government also aims to achieve a lean and mean force by gradually reducing the total strength of the armed forces from over 1.5 million personnel to under 1.1 million within the next decade. However, the budget allocated towards capital expenditure in the defence sector has increased by 3.36%. This is being used to modernize the defence sector by acquiring the latest technology weapons such as fighter jets, UAVs, missiles, etc.
Moreover, the Finance Ministry’s budget allocation has increased by 3% from FY18 to FY24, primarily driven by huge interest payments and a substantial increase in funding for the Revenue Department. The interest payments amounted to 70% of the total finance budget back in FY18, which now form approximately 64% in the FY24 budget. The interest payment has doubled since FY18 in absolute terms, but due to an increase in the finance budget amount, its proportion has decreased. As one of the ministry’s most critical functions, the Revenue Department is responsible for comprehensive tax administration, encompassing both direct and indirect tax collection and management. The department oversees the Indian Revenue Service (IRS), enforces economic legislation such as the Foreign Exchange Management Act (FEMA), and ensures compliance with tax regulations.
With the government’s mission of “Viksit Bharat 2047”, which aims to transform India into a fully developed nation by the year 2047, a lot of additional funds are being allotted to the ministries, which will help India improve its infrastructure, technology, etc. Hence, the funds allotted to ministries responsible for developing infrastructure (Road Transport & Highway, and Railways) have increased over the years. The budget has increased by 2.98% and 2.8% for Road Transport and Railways, respectively, since FY18. The Road Transport and Highways budget has been utilized for various projects such as Bharat Mala Pariyojana, developing expressways like Delhi-Mumbai, Bengaluru-Chennai, etc., and projects like the Electrification program, introducing new trains like Vande Bharat, etc. have been utilizing the Railways’ budget.
In contrast, the budget allotted to the Ministry of Consumer Affairs, Food and Public Distribution, responsible for consumer protection and ensuring food security via the Public Distribution System, is heavily dependent upon the Price Stabilization Fund, whose funding is need-based instead of being recurring. Hence, the budget fluctuates. While the subsidy over the years has not decreased, understanding its reasoning requires a more in-depth analysis.
Although the actual numbers have increased, the share of the budget allocated to the Rural Development Ministry in FY24 has decreased. The focus of the government has shifted to providing housing facilities to all through Pradhan Mantri Aawas Yojana and other housing services, which have seen a major funding increase over the years.
The Human Resource Development (HRD) ministry, now Ministry of Education, which mainly formulates and implements policies related to school education, literacy, and higher education across India, has also seen a decline in the budget allocation due to a priority shift. The government’s shift of priority from education to infrastructure development and defense sector is one of the reasons for the decline in the budget allocation. The government has slashed UGC funding and has shifted to a loan-based model instead of providing grants to students, which shifts the responsibility from the government to students.
An increase of 1% in the budget allocation of the Telecommunication Ministry shows an added attention to the digital divide between rural and urban areas. The government is trying to bridge this gap by providing broadband access to all Gram Panchayats through the BharatNet program, enhancing connectivity in rural areas. The funds have also been utilized to modernize telecom, revive/support BSNL/MTNL, and promote digital literacy.
Conclusion
With the changing years, the budget of Indian government has also changed. The budget estimated for a ministry is a gauge of the attention and focus it is getting in that fiscal year. With the changing budgetary allocations, a shift in government policies can be observed. Trying to break free from the chains of debt, the government is trying to build infrastructure as well as long-term assets for sustainable growth. Additionally, the focus towards becoming a superpower is also photo bombing the bigger picture through an increased capital expenditure towards defence. However, only the development of roads, railways, airports, and ports is not enough for sustained development. The decision to reduce the budget of the Education and Rural Development Ministry should be scrutinized for the coming years. Because of the lesser attention towards education and rural development, the government cannot produce a highly skilled population and achieve its targets of Viksit Bharat or Make in India, which will ultimately help it to achieve its long-term goal of becoming the third-largest economy in the world.
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