Is India’s budget math for real?

March 4, 2016

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ever since India’s budget was announced on February 29, we have repeatedly been asked three main questions. The common thread underlying them is a very legitimate query: How is the government planning to do all the proposed spending while remaining fiscally disciplined? Or, alternatively, is the government really going to spend all that money?

Here are our answers:

Has the government really budgeted for the wage hikes?
Around 70-75 percent of the Seventh Pay Commission recommendation has been budgeted for (see Chart 1 below). The data is not easily available but can be calculated. Basic salary and pension (including defence) increases will be paid out this year, but allowances have been deferred. The 18 percent year-on-year rise in the pockets of India’s bureaucrats is lower than the 24 percent envisaged earlier, but still bulky enough to buttress the consumption recovery we are witnessing.

A decade has not passed since the last 10-yearly increase in allowances, so deferring it in order to meet fiscal targets is likely to be politically acceptable. To the extent the center’s decision impacts the states, they could also defer allowances, keeping the increase in India’s consolidated deficit in check.

chart1

Is public capex going up or down?
In the budget, “capital expenditure” showed a decline of 0.2 percent of GDP. But this is not the full picture. As a result of the way India organizes its data, only the capex the central government does by itself falls into this category. But there is a ton of capex the states do that New Delhi funds. These, strangely enough, fall into the “current expenditure” bin. If we disregard them, we find the overall central government capex thrust has remained unchanged at 2.8 percent of GDP (see Chart 2).

Beyond the central government, India’s public sector enterprises (PSEs) form another part of the picture. On aggregate, PSEs intend to increase capex by 0.3 percent of GDP. Those who wish to see the full public capex picture – the center, PSEs and the states’ own capex, combined – will have to wait for a month. As the state governments begin to announce their respective budgets we will get a hang of their investment plans.

Until then, it is safe to say that central government’s capex thrust remains flat, while the PSEs want to bump up spending.

chart2

Is there really a sizable rural stimulus?
No. Not as a percentage of GDP, and we need to scour the data to find out why. About six ministries account for the bulk of India’s rural spending. Once we standardise some changes in definitions – for example, interest subsidies were earlier calculated as expenditure under the Finance Ministry but are now classified under the Ministry of Agriculture – rural spending as a percentage of GDP remains unchanged. What’s changed is the way the pie is shared. For instance, more money has been allocated to crop insurance and irrigation.

All told, from the central government’s perspective, the capex and rural thrust outlined in the budget are broadly unchanged.

Finally, we think the math works. The only spend on the book that is really increasing is wage hikes. Much of it is likely to come from savings in subsidies and other expenses not related to capex. The fiscal consolidation of 0.4 percent of GDP will be funded by higher revenues. Even if asset sales don’t live up to promise, higher tax revenues on the back of tax policy changes are likely to do the trick.

chart3

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