Now that the NDA has got its thumping mandate, it’s time for the real deal. The first Union Budget in NDA 2.0 and the first one by Nirmala Sitharaman, the freshly minted finance minister.
It’s budget season. And if you are wondering “Wait, didn’t we just have one?” yes indeed, we did indeed have one recently. But that was the interim budget in an election year. Now that the NDA has got its thumping mandate, it’s time for the real deal. The first Union Budget in NDA 2.0 and the first one by Nirmala Sitharaman, the freshly minted finance minister.
Just a quick history lesson before we launch into the heart of the matter. In historical terms, the annual Budget is a fairly new invention. The origins of the budget exercise, however, lie in kings and queens behaving badly and spending (and overspending) like, well, kings and queens. The Telegraph noted, “The office of the Treasurer began life within that of the Exchequer, which was responsible for managing the Royal revenues and for issuing and collecting cash. Having been established at the time of the Norman invasion in the 11th century, the Exchequer did not receive its first major reform until the reign of Elizabeth 1. Following reform in the 1580s, a deficit was quickly turned into a surplus.”
That sounds promising, you’d think. But it did not take long for future monarchs to squander away the country’s tax revenues and rack up mountains of debts. Charles II landed the country's finances in such a mess that the Dutch managed to seize the Royal Charles, the navy's flagship, in 1667. It was this humiliation that prompted another spate of reform and the establishment of the principle that even if Parliament has approved of expenditure it needs the approval of the Treasury. It is a rule that still stands today in Britain.
It was not until the early 18th century that a version of the annual Budget emerged. While at first referring only to the Chancellor's annual speech on the country's finances, the word quickly became used for any financial statement or plan.
The beginnings of what we have come to know as the Budget did not immediately act as a complete safeguard for Britain's finances. The bursting of the South Sea Bubble in 1720, for example, wrecked the country's balance sheet and led to the imprisonment of the Chancellor in the Tower of London. Toward the end of the same century, in 1789, Pitt the Younger introduced income tax.
The Union Budget is, of course, the annual financial statement of expenditure and receipts of the government of India for the financial year, as required by the Article 112 of the Constitution. But like any budget – yours or mine – what we need to also understand is how much money there is, and how much of it can be spent and on what. And that first question is what we attempt to address today. What is the source of income for the massive joint family that is India? How does India make its money? On this edition of Digging Deeper, that is the question we will ask – a question Aunties and Uncles ask before making any marital alliance for their children – what is the source of your income and how do you intend to spend it? We will pose this question to the man of the hour, Mr India.
The word Budget is often said to be derived from the old French word for a little bag or purse. But there is a little more to it than meets the eye. As the Oxford English Dictionary points out, the phrase ‘to open one’s budget’ was being used in the sixteenth century to mean that someone was revealing something which was secret, perhaps even dubious. It meant something like bringing out a box of tricks.
On this edition of Digging Deeper, let’s find out what goes in and comes out of this box of tricks.
First, let's show you the money:
The Indian government, like most others in the world, earns money, i.e., gets its revenues by collecting taxes from citizens and corporations, and on goods and services. The receipt budget, which lays down the details of the sources of earnings, is also part of the budget presentation.As DNA reported last year, this is the source of our moneys:
- 19% of the rupee comes from corporation tax
- 16% from Income Tax
- 9% from Customs duty
- 14% from Excise duty
- 10% from Service tax and other taxes
- 10% Non-tax revenue
- 3% Non-debt capital receipts
- 19% from borrowing and other liabilities
If you bristled at the thought of a poorly maintained road, or irregular electricity supply, and screamed into the void, “I pay taxes! I deserve better!” you are right of course, you do deserve better. But know also that your taxes count for less than a fifth of the country’s collective income – 16%.
In 2017-2018, the government gained Rs 15.15 lakh crores in revenue receipts and about Rs 6.3 lakh crore in capital receipts, taking the total to about Rs 21.5 lakh crores. (numbers from PTI)
Broadly considered, the government makes money through tax revenues, non-tax revenues, and capital receipts.
Here we have to understand something called Gross Tax Revenue – it comprises of the following components (numbers are FY18 estimates): Corporation tax (5.38 lakh crore rupees, as of last year); tax on income (4.41 lakh crore rupees); customs duty (2.45 lakh crore rupees); excise duty (4.06 lakh crore rupees); and service duties (4.75 lakh crore rupees). Of course, starting last year, the Goods and Services Taxes (GST) has replaced the Excise and Service duties. The share of the income tax contributing the GTR is coming down progressively. In the year 2015-16, corporation tax made 31% and income tax made 20.5% of the total tax revenue collected by the government. In the year 2016-17, corporation tax made 21% and income tax made 14% of the total tax revenue.
What about non-tax revenues? These come from the money earned by the government other than the tax routes, as the name would have it. The largest chunk of these is collected from profits and dividends of public sector undertakings (PSUs) – including PSU banks and the RBI. For FY18, the non-tax revenue collected by the government from PSUs and the RBI amounted to about 1.45 lakh crore rupees. Revenue collected from sale of spectrum forms the second largest part of the non-tax revenue. The remainder of the non-tax revenue is collected from royalty on inland petroleum, tolls collected from national highways, interests, etc. Non-tax revenue constitutes about 11% of the total receipts.
Then we have Capital Receipts: Collection of capital receipts come from borrowings and other liabilities. The largest part of capital receipts is collected from market loans. Rest of it is collected from recovery of loans, disinvestment, small savings securities, external debt and others. Capital receipts formed about the 26% of the total receipts as of FY18.
And then there are proceeds from divestment in public sector enterprises. The Economic Times reported that the government raised a record Rs 77,417 crore from sale of its stake in public sector units in 2018. The disinvestment programme is headed for another blockbuster year in 2019 with planned privatisation of national carrier Air India.
Shares of the pie:
This joint family has several earning members contributing to the coffers. But who is the top earner? As a useful sidenote, let’s take a look at the contributions of various sectors in the country to its GDP.
Agriculture, predictably, was the highest earner, but the contribution from agriculture has come down over the years – 17% of the country’s GDP was contributed by agriculture in 2017.
Chemicals are big business in the country. Reliance, one of the country’s largest companies, has a petrochemical refinery as one of its most important components. The chemical sector contributed about 2.11% to the Indian GDP in 2016. The petrochemical industry contributes approximately 30% to India's chemical industry, which is expected to become a $250 billion industry by 2020.
India’s mining industry made up over 2.6% of the country’s GDP in 2015 to 2016.
Direct and indirect activities related to tourism are also big contributors to the country’s GDP with them adding 9.6% of the country’s GDP in 2016.
The star of the show, however, since the economic reforms of 1992, is the services industry. As investopedia noted, “Over the past 60 years, the service industry in India has increased from a fraction of the GDP to over 55% in 2018. India, with its high population of low-cost, skilled, English-speaking, educated people, is a great place for doing business. IT companies contributed almost 8% of the country’s GDP in 2016.”
The government is basically a very large joint family. Think the Viranis from Kyunki Saans Bhi Kabhi Bahu Thi, except not just Gujaratis, but also Tamilians, Kannadigas, Maharashtrians, Bengalis, well… basically everybody in the country. Not to forget the fact that this joint family’s population is, well, 1.3 billion people. A billion, just for our revision’s sake has 9 zeros. And for some more mindboggling context, all of Europe – an entire continent – has 743 million people. That is over 40 countries and about half the population of India. Even all of Africa does not have 1.324 BILLION people. So basically, the expense account of this joint family is continentally monumental. So how do we do it?
When planning a ghar ka budget, we have to first take care of the essentials right? Daal roti khaane hain, prabhu ke gunn bhi gaane hain. But can we have caviar this month? Or is it for next month? Or ever? Can we go on holiday this month? Do we have to go on holiday this month? Or can this wait? Does Pintu need IIT coaching, or are his college classes enough? Should we upgrade the car or is the old one okay with some re-upholstering? Just like mummy papa think of all these things, so does the Finance Minister ka parivaar. Except her parivaar is the entire nation.
The first order of business in this household, as in any other, is prioritizing. The government has to set aside funds for infrastructure, welfare schemes, subsidies and salaries, among many many other requirements for the batti of the household to keep burning.
Which brings us to the important question of paise kahaan se aate hain? Tumhara baap dega? Well, in the nation, we are all each other’s baaps. The taxes we pay, the earnings we as a nation make, take care of the rest of us. And how do we spend it? That’s what the budget is all about. There are two ways in which the money is allocated. We are now talking about the Spending Streams.
Government spending is listed under two heads: Revenue Expenditure and Capital Expenditure. Now if they seem like big words you see in a macroeconomics textbook, it’s because, well, they are. We at Moneycontrol are here to simplify them for you.
Revenue Expenditure: Now this is the amount spent on day-to-day running of departments, interest payments, subsidies and salaries. In the Hindustani Joint Parivaar a la The Viranis, revenue expenditure translates to spending on the basics of day-to-day living – roti, kapda, makaan, bijli. People who work for the government need to be paid, no?
The second stream is Capital Expenditure: Now this is the money spent on creating assests and investments in land, machinery, and projects. This is like the mother of the joint parivaar saying, “Chalo, kuchh gold khareed ke rakhte hain abhi, jab Chameli ki shaadi ki time aayegi, tab humein sochne ki naubat nahi hogi.” It is essentially planning for the future. Buying a house – let’s say. “Should I buy it in Bandra, or should I move a little further to Andheri? Or perhaps Versova is all I can afford for now. But really can I even afford a house at this point? Maybe I should stop eating out altogether, you know… And really, do I have to take an Uber all the time? Could I not take the train? It’s a lot quicker, and I’ll save some money. Maybe I can then buy a little flat in Versova.”
And finally, a quick look at how big the Hindustani Joint Parivaar budget has gotten. In 2004-05, the size was about 50,000 crores. And in a swift span of thirteen years, take a guess as to where it might be? Double? TRIPLE? BHAI. We have gone FOURPLE! Even the right word is not coming to me. We have QUADRUPLED the size, bhaiyon evam behnon, to over 200,000 crores in total expenditure.
Bhai, can you imagine how much toor dal I would have to buy for a family of 1.324 billion? It’s a good thing I don’t even know how to make daal. It’s all mummy’s problem. Or in this case, Nirmala Sitharaman’s. You know… something tells me, I am not jealous of her job.
What is fiscal deficit and how does the government bridge it?
Have you ever thought of how the government makes ends meet? If this was a Hindi film from the 1970s, and the family found itself in a tight situation, you know what Nirupa Roy would do. She would take the kangan that was the family heirloom and beg Pran, the moneylender, to save her family from destruction. Pran would be super mean to her, and looking from a corner would be a young boy who seethes in rage quietly and grits his teeth and the next frame cuts to Nirupa Roy crying and the next frame cuts to even more seething young boy and there’s music and the next frame is Amitabh Bachchan in bell bottoms doing some more seething. But the point is that’s how Ms Roy bridged the deficit. The fiscal deficit is a measure of how much the government – or Nirupa Roy, in our analogy – borrows annually. The government has set a fiscal deficit target of 3.4% of the GDP for FY20. But how does the government do the same?
The government raises loans from the market by bonds. The RBI auctions these bonds on the government’s behalf. And financial institutions and banks mostly buy these bonds. Simple enough? Next.
No no, this has nothing to do with Buffalo Bill or Bill Clinton or the Rhinoceros Hornbill. Have you seen that thing? That’s a crazy looking bird. But treasury bills are not. For temporary cash flow, the government issues short term treasury bills or bonds. These b0nds have a maturity of 364/ 182/ 91 days.
The government, let’s call her Nirupa Roy for this installment, also borrow money from individuals through saving schemes. Post Office Savings, National Savings Certificates, Public Provident Funds etc are some examples of such small savings. These are pooled under the National Small Savings Fund or the NSSF. And it could also be temporarily used for bridging the deficit.
The writing and printing of the Budget
It stands to reason that the making of a magnum opus such as the Union Budget is a long drawn one. Rome wasn’t built in a day; Lagaan wasn’t made in a day. Don’t we all know that the Making of Lagaan is in itself a feature-film length documentary? The budget is also essentially the making of Lagaan – it is all about taxes, isn’t it!
It takes a village to raise a child, said Hillary Clinton in her book. What does it take to raise the Union Budget? Seemingly a ballet company and a juggling act. It juggles political pressures, the economy’s priorities, and the needs and wants of the most important component of the budget – the people of the Republic.
ACT ONE: A Circular is sent
In a normal non-election year, Act One begins as early as August. A circular is sent to the various ministries and departments. Think of it as a large joint family, and the matriarch, the finance minister, sending the grocery book to the rest of the family. Pintu wants almonds because he thinks they will make smarter and Bunty wants whey protein because he thinks it will make him hotter. Different priorities; different needs. Different ministries; different requirements of cash. These ministries and departments fill the circular with details of the funds they need and the circular returns to the mother, Mr Nirmala Sitharaman. That ends Act One.
ACT TWO: Consultations are made
Consultations. If you’ve seen Game of Thrones or any show with palace intrigue and courtier dealings, then you get a sense of Act Two of the making of the budget. Ministry officials meet industrialists, farmers, labour unions, and other groups that have a contribution to make to the drafting of the document, the details of which affect all walks of society. The finance minister then chairs final meetings with stakeholders.
If we want parallels from history or entertainment, or historical entertainment, think Lord Varys or Oliver Cromwell. And you start getting an idea of who the main players of Act Two are. But, it’s not just the protagonist of the show Mrs Sitharaman, it’s all the officials in the ministry and the powers that be in the country. In my wild imagination, Act Two involves dark rooms with mahogany furniture covered in smoke. But it probably is more like the conference room you and I know and involves the Excel Sheets you and I loathe. A lot of Excel sheets.
ACT THREE: The Quarantine
The details of this act could put any political thriller to shame. This is the act of the Quarantine. You may have encountered the term Quarantine only in relation to diseases like bird flu or swine flu, but here we are, enforcing quarantine in the Union Budget.
Officials, stenographers, technicians – anyone who may have access to the details of the document are quarantined at North Block’s basement. They are cut off from the outside world for seven whole days. It’s a sort of Bigg Boss situation. And funnily enough, these officials will have to wait seven whole days to find out what happened on the actual Bigg Boss. No Facebook, no Instagram, no Snapchat. All I imagine now are horrified faces of twenty-somethings. The intrigue gets even more intriguing. Intelligence Bureau officials monitor movements and phone calls of these members. A phone jammer is installed to block calls and prevent leakages.
The background music for Act Three is an almost Hans Zimmer score. It’s tense, it’s hectic, and you are cut off from the world.
THE FINAL ACT: Printing of the speech
The Finance Minister’s Speech – it doesn’t quite have the ring of The King’s Speech, does it? Nevertheless, this speech, the climactic act of the Making of the Budget is among the most closely guarded documents in Indian politics. It is a culmination of the months of work by hundreds of people. The printing of the speech starts at midnight, two days before the Budget. It’s printed in the basement of North Block on Raisina Hill. The same North Block where so many officials were quarantined for seven days. The background score to this final act? A lot of sighs of relief and hopefully some champagne bottles being popped. There was blood, there was sweat, there were tears. There will hopefully be some champagne. Not just for the people behind the Making of the Budget, but also to all us, the common men and women, the payer of the Lagaan.
The Budget speech
The annual budget speech is a showcase event for every Indian government. For the finance ministry, it’s the piece de resistance. The one day in a year the vitt mantri is perhaps more important that the Pradhan mantri.
The budget speech is the one that the finance minister presents after posing with that sober looking, business-y briefcase. The briefcase is an old tradition in itself. Like all things Indian, it began with a British finance mister who used a red briefcase way back in 1860. And, I guess, everybody was very impressed! How else do you explain a red colored briefcase being so popular? Anyway, India mein the finance ministers were adventurous, changing the color of the briefcase to brown and even black. British vitt mantris continue to use a red briefcase.
Until 1999, budget speeches were presented at 5pm on the last working day of February every year, in keeping with the Indian government’s colonial heritage. This was changed in 1999 by Yashwant Sinha who started presenting the budget at 11am. 2017 onwards, Arun Jaitley has switched to presenting the union budget on the 1st of February. Nobody still knows for sure why. In an election year, an interim budget is presented, and once the government is in place, a Union budget is presented, which is why we are having one on the 5th of July.
The budget determines how money will be handled by the government. Most importantly for us, the annual budget can either augment or diminish our incomes. Millions of people gather around their tv sets or watch on their mobile phones the live telecast of the budget. Yahi woh ek din hai jab India ka cricket match bhi log ignore maarte hain, because we all want to know if our 80 C exemption limit has been increased. And how much our home loan is going to cost us. Or do we have enough funds to go on a 2 week honeymoon trip to Australia. Varna Ooty ya Shimla hi chale jaayein phir se, like when we started dating.
The speech itself is divided into two parts – A and B. Part A usually contains an overview of the state of the Indian economy. Progress report hi maan lijiye isko. Aur opposition bhi bhaita hai parliament mein, real time feedback dene ke liye. Oppostiion parties are usually never happy with the state of the economy. Pata nahi kyun. Anyway, part A also contains major economic policies that the government intends to initiate. For instance, big ticket schemes like the many Pradhaan Mantri schemes like Aawas, Ujjwala, etc, Ayushman Bharat, MNREGA, NRHM, Bharat Nirman, JNNRUM etc. were announced in part A of the budget speech. This first half also contains estimates on the government’s expenditure as well as the fiscal deficit. Fiscal deficit is the shortfall where the govt doesn’t have enough money to spend on its schemes.
Part B contains the tax proposals that the government wishes to implement. This includes both direct and indirect taxes. Income Tax and customs duty are also covered in Part B. Speaking of indirect taxes, 2018 was the first budget by Arun Jaitley after GST came into effect.
Once the budget is presented, it’s the turn of talking heads and analysts and editorials taking over. What was good, what bad. And me, coming back tomorrow to explain all that went down in the speech.
****Odds and ends:
- The longest budget speech in terms of words was given by Manmohan Singh in 1991. It comprised 18,177 words. This was the budget that tried to liberalize the economy, opening the government and the private sector to international competition. Arun Jaitley is credited with delivering the second, third and fourth longest budget speeches in 2014, 2017 and 2016, respectively. Jaswant Singh took the longest time—two hours and 13 minutes—to present his budget in 2003. H.M. Patel’s 800-word interim budget in 1977 had the shortest speech. Morarji Desai’s presentation of 10 budgets is the highest delivered by any finance minister. He is followed by P. Chidambaram, who has presented nine Union budgets.
- The first budget of independent India was presented for a period of seven months. The FM at the time, R. K. Shanmukham Chetty, presented it on 26 November 1947.Three generations of the Gandhi-Nehru family have presented union budgets - Jawaharlal Lal Nehru, Indira Gandhi and her son Rajiv Gandhi presented the budget while serving as prime minister. In 1970, Indira Gandhi became the first woman finance minister to present the budget; in addition to being prime minister, she also held the finance ministry. Two finance ministers have gone on to hold the highest office in the republic, that is the President of India - R. Venkataraman and Pranab Mukherjee. C.D. Deshmukh was the first Indian governor of the Reserve Bank of India who later became FM and presented his first budget in 1951.
- ‘It’s a dirty job, but somebody’s gotta do it.’
For a chancellor presenting a budget, inviting bouquets and brickbats is all part of the game. Perhaps one might allow him the pleasure of a small luxury during such a trying time? Believe it or not, the chancellor, in recognition of his efforts in presenting a budget, is allowed a tipple during this arduous task.
In a speech which could last hours, any chancellor might get thirsty, and if the minister wants to deliver the Budget with an alcoholic drink at his side, he – or she – can do. It’s the only time of the year the rules about drinking in the chamber are suspended – but only for the chancellor. Nigel Lawson used to drink a spritzer and Geoffrey Howe – who went on to name his dog “Budget” – would have a gin and tonic at his side. Gladstone, the first user of the red box, would wash down delivery of the budget with sherry and beaten egg. In recent times, the Chancellors have resorted to the unadventurous and staid choice of mineral water.
Even though this practice would not ever be allowed in India, we can still admire this kind gesture allowed to the thirsty UK chancellor, can’t we?Now, let’s raise a toast to that!