Thursday, March 01, 2007

India's budget

Until fairly recently, India's annual budget exercise used to be anticipated eagerly. The Indian government had a big role to play in the economy and the budget could often make life more (or less) unpleasant for millions of Indians. The impact of the budget on the economy is not as dramatic as it used to be, both in perception and reality. Reporting conventions though, have not changed very much: an arbitrary list of new taxes, sops, subsidies and measures are reported, with barely any context or overall picture. Here is an extract from such a list published under the headline "Highlights of Union Budget":

* Employee Stock Options brought under Fringe Benefit Tax

* Excise duty on petrol, diesel reduced from 8% to 6%

* Specific duty on cigarettes increased by 5%;

* Specific duty on beedis raised from Rs 7 to 11 per Thousand for non-machine made and from Rs 17 to 24 per Thousand for machine made

* Duty on pan-masala not containing tobacco reduced from 66 to 45 per cent

You can of course go to the source of all the budget data for India if you want more information. This very useful one-page summary is the best place to find some overall context. The following table uses a little bit of additional data as well:
(Rs., billion) 2005-06 (Actual) 2006-07 (Est.) 2007-08 (Budgeted)

Receipts 3597 4293 5296
Expenditure 5061 5816 6805
Deficit 1464 1523 1509

Interest payments 1326.3 1461.92 1589.95

26% 25% 23%
Defence 817 860 960

16% 15% 14%
At an exchange rate of Rs. 45 to the US dollar, government expenditure in 2005-06 was $112 billion and the deficit was $33 billion (about 5.6% of GDP).

The big ticket items are interest payments and defense allocations. Interest payments account about 25% of the expenditure and defense for about 15%. About 90% of the deficit for 2005-2006 arose from interest payments. In fact, if projections turn out to be correct, the Indian government would experience a surplus in 2007-08 in the so-called "primary deficit"- the deficit if it did not have to make any interest payments.

The scenario in which interest payments are insignificant is not as far-fetched and wishful as it might seem at first sight. India's total external debt is around $135 billion and its forex reserves are around $180 billion. If India decides to payoff its external debt (like Brazil and Argentina, who paid off some of theirs last year), it would make no difference to the net position, but it could save a substantial amount of money that goes annually to servicing this debt. Of course, there is the small matter of internal debt, but that is not such a bad thing, economically speaking.

The size of the defense budget is large for an emerging country like India. A fair amount of it goes to assorted countries in the world among whom are Britain, France, Russia, Israel and somewhat surprisingly, the Czech republic. This has generated a constant stream of scandals, with well-connected middlemen and politicians skimming off large commissions. According to this newspaper report, as many as 48 defense contracts are under investigation, with former defense minister George Fernandes being a target of at least one investigation. One ubiquitous wheeler-dealer, son a former Admiral and himself an ex-navy man, was the subject of income tax raids yesterday.


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