Revenue and Expenditure of Governments in India

1. Part-I
The Reality of Government Revenue
Writing over two centuries ago, Edmund Burke aptly summated “The objects of a
financier are, then, to secure ample revenue; to impose it with judgment and equality; to
employ it economically ………………. by the clearness and candour of his proceedings, the
exactness of his calculations, and the solidity of his funds.” In contemporary India, the
impression that a lay person gathers is the opposite.
Notwithstanding claims made by successive governments about collecting more
revenue, the rise in revenue collections remains largely illusory in the last two decades.
Government data does not use any deflators or anchor their money value to any base year.
The result is that brownie points are scored by the rulers over the ruled as the shrill battle of
the ballot is enacted every 3-5 years with government agencies becoming willing pawns in
this ugly game.
The Public Finance Statistics, of the Ministry of Finance, show a twelve-fold rise in
tax collection from 1990-91 to 2008-09. Very impressive, but when reduced to 1989-90
prices, about Rs. 2500000 crore would be the present value of taxes that ought to have been
raised without any real increase in taxation collections. Instead, only 40% of this figure was
raised in 2008-09 (at 1989-90 prices). If tax collections are held constant at 1990-91 levels, in
2008-09 total revenue collections should have been about Rs. 2880000 crore at 1989-90
prices instead of Rs. 1190000 crore. Shifting the base year for comparison to 2000-01, the
rise in revenue collections up to 2008-09 is three-fold although the corresponding money
value is four-fold less. Cumulative 241% inflation from 1990-91 to 2008-09 has therefore
reduced any physical progress to an optical illusion. And 1989-90 was certainly not the best
fiscal year for governments. If inflation for 2009-10 were added, revenue collections would
depreciate by over 250% from 1989-90 to 2009-10.
Over the last two decades, several thousand crore rupees have accumulated in tax
appeals, under and exaggerated assessment of taxes, mostly in return for illegal gratification
as by tortuous judicial processes. The Comptroller & Auditor General (CAG) shows 42402
cases involving duty of Rs. 30423 crore pending for adjudication/recovery as on March 31,
2008. Of these, 27% were pending with the adjudicating officers of the department.
Incidentally, departmental pendency rose by over 23% from 2006-07 to 2007-08. As if this
were not enough, the Central Board of Excise and Customs (CBEC) was able to recover
barely Rs. 216 crore (7%) of Rs. 3543 crore pointed out by CAG and accepted by CBEC in
2007-08. The tale of lost appeals before tribunals and courts owing to exaggerated and often
arbitrary claims also detracts from ramping up collections.
The position is not far different when it comes to income, corporation and state taxes.
CAG points out a mind-boggling Rs. 85000 crore as uncollected incomes and corporation
taxes upto Mar 31, 2008. CAG adds that in about 10 lakh cases penalties were awaiting
realization. Even where penalties were imposed by I-T authorities, they did not exceed 56%
of the total number of cases in 2007-08. What about the remaining 44%? Delays in direct
refunds of I-T impoverished the central government by another about Rs. 4500 crore by
interest payouts in 2007-08. In Maharashtra appellate authorities stayed recovery of arrears of
revenue of about Rs. 10000 crore while in UP this figure is about Rs. 2000 crore. The state’s
cumulative arrears of revenue are a mind-boggling Rs. 24444 crore while UP’s arrears are
about Rs. 16000 crore in 2007-08!

2. In the absence of inflation accounting, companies stand to gain by delayed appellate
judgements on taxes while the State loses heavily in real terms, if and when, a favourable
verdict comes its way. CAG points out that Maharashtra, Andhra Pradesh, Tamil Nadu and
Uttar Pradesh lost substantial revenues of about Rs. 4000 crore by underassessment, short
levy, etc. in 2008-09 alone.
Further, collection charges for taxes have risen seven-fold from 2% in 1989-90 to
14% in 2008-09 at 1989-90 prices. CAG notes an excessive 50% increase in collection
charges from 2003-04 to 2007-08 despite the fact that nearly 90% of corporation taxes were
as advance tax and mainly accounted for by banks and I-T accounts offices. Similarly in the
states, Andhra Pradesh, UP and Maharashtra’s cost of revenue collection are substantially
higher than the national average.
Non-tax collections too have stagnated at 1989-90 prices and at 1990-91 levels.
Although the nineties witnessed a decline in non-tax revenues, collections in 2008-09 have
returned to the 1990-91 level, at 1989-90 prices. If non-tax collections are held constant at
1990-91 level, non-tax collection should have been Rs. 319000 crore, instead of Rs. 119000
crore in 2008-09, at 1989-90 prices. The growth of revenues by way of dividends from
central and state PSUs at 1989-90 prices ranged from negative to a maximum of 7% of total
revenues in the last two decades and steadily declined to less than 5% in 2008-09. This is
when Rs. 147000 crore equity and Rs. 76000 crore as loans from scarce public moneys have
been invested in 281 central PSUs since the 1950s. Adding investments in State PSUs since
the 1950s, would multiply this manifold.
In effect, revenues have grown negatively in real terms in the past two decades. An
accretion of 400 million heads to India’s population from 1990-2000 and liberalization may
have diluted revenues. On the flip side, there are claims of large rises in revenue collections,
a large part by way of new initiatives such as service tax on everything, but marriages and
child birth. Evidently, large sectors of our seemingly prospering economy remain outside the
pale of taxation, by acts of commission and omission while development suffers. A growing
population has only added to our impoverishment instead of adding to India’s productivity
and revenues in real terms. Cultivating fish, mushrooms, flowers and exotic fruits and
vegetables are hardly ever taxed but the salaried class bears a heavy burden, tax holidays are
prolonged, collections are inefficient, for major corporations it is cheaper to appeal for
remission/reduction of taxes than to pay up front, easier still to secure favourable assessments
while the impoverishment of the masses increases. Evidently, Burke’s prophetic view on the
“The objects of a financier are……to secure ample revenue; to impose it with judgment and
equality….” ring hollow in the Indian context. (1044 words)
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3. Part - II
The Reality of Government Spending
The combined revenue and capital expenditure of the central and state governments
has prima facie, risen ten-fold from about Rs. 150000 crore in 1990-91 to about Rs. 1450000
crore in 2008-09. Accounting for inflation since 1989-90, government expenditure ought to
have risen to about Rs. 3500000 crore in 2008-09, i.e. two and a half times more than that
budgeted in 2008-09. On the qualitative front, the ratio of development to non-development
expenditure in 1990-91 was 1.07. This declined to 1.04 in 2008-09. While there is a marked
improvement from ratios as low as 0.73 in 2002-03, yet non-development expenditure
remains an area of grave concern. Even within development and non-development spending,
the ratio of revenue to capital expenditure ranges from a high of 0.60 to a low of 0.53 in
2008-09. Capital development expenditure is therefore lower than non-development revenue
expenditure by 40-47%. Segregating capital assets from the cost of running the existing ones
(revenue), the ratio of revenue to capital expenditure is about 2:1, i.e. development
expenditure on revenue account outstrips development capital asset accretion twice over. Yet
most our capital projects are in poor physical state, the absence of maintenance funding
showing in cracks in bridges, potholes in roads, inadequate desilting in ports, etc.
Such adverse ratios are therefore reflected in near stagnant or even declining outlays
in several areas. Expenditure on social and community services comprise 47% of
governments’ developmental spending in 2008-09, up from 42% in 1990-91, at 1989-90
prices, albeit a notional increase in real terms. Here too revenue expenditure is nearly twelve
times capital expenditure even as capital asset accretion for social and community services
have doubled from 11% to 22% of governments’ total capital expenditure from 1990-91 to
2008-09. In a similar vein, there are no real major hikes, inter alia, in governments’ budget
allocations for medical, public health, water and sanitation, agriculture and allied services,
education and rural development.
Although more than half of India’s billion-plus population is rural, rural development
outlays have never exceeded 8% of total development expenditure in the last two decades.
Again, the capital to revenue ratio for medical, sanitation, et al, is skewed at 1:3, i.e. revenue
expenditure is thrice capital expenditure. Even where the country’s defences are the matter of
the citizens’ gravest concern, the defence budget has shrunk from 22% of total non-
developmental expenditure in 1990-91 to 15% in 2008-09 at 1989-90 prices. However, the
only saving grace is that the revenue to capital ratio for defence is 1:1, i.e. Re. 0.50 of every
Rupee is evenly spent on revenue and capital each on our defence services.
Chaos in India’s urban centres is understandable with a 3% rise (of development
expenditure) in allocations in real terms. In contrast, the India Infrastructure Report (IIR),
2008, shows India having an annual urbanization rate of 2.5%, with the second highest urban
population in numbers in the world. Yet 45% of populations in Bihar and MP do not have
access even to a latrine. Broken roads and bridges similarly, are the result of a 4% real
increase (of development expenditure) in allocations in the last two decades, up to 9% in
2008-09. A study quoted by IIR, 2007, states a one crore rupee investment in rural roads lifts
1650 persons above the poverty line when 80% of India’s road network is in rural areas. If all
these developmental budget heads are aggregated as a proportion of the total expenditure by
governments, the real increases remain illusory, some even negative. The IIR, 2007, states
India requires about $320 billion in 2007-12 to repair and add to its physical infrastructure.
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4. Such upgrading includes catering to a 55 billion unit energy shortage in 2006-07. Where does
the money for all this come from?
Every year governments show surpluses on capital account aggregating a staggering
Rs. 920000 crore from 2000-01 to 2008-09 (in nominal terms) against capital assets of Rs.
917000 crore created in the last decade, a ratio of 1:1. Such assets include fancy office
buildings, residential accommodation for government employees and thousands of
incomplete and delayed projects. Neither citizens nor governments however, have the
foggiest idea of the capital assets the nation owns.
The epicentre of government spending in India are salaries, allowances and pensions
of several crore public employees that has risen from 23% of total non-development
expenditure to over 26% in 2008-09, at 1989-90 prices. The Railway Budget for 2010-11 for
shows the current year’s outgo for their pensioners at about Rs. 15000 crore.
If a conservative additional 20% each of non-developmental and developmental
expenditure for pilferage, wastage and deficient/redundant services were added to
governments’ official salary and pension budgets, government and its intermediaries
consumed 52% of total government expenditure in India in 2008-09. Adding another
conservative 10% of the development budget (Rs. 74000 crore in 2008-09) tied in
infructuous/delayed projects and poor, even negative, return on investment in PSUs plus lost
interest, government spending upon itself rises to Rs. 850000 crore. Thus of every rupee
spent by governments 57 paise is expended on government while 43 paise is spent on
governance – a figure perilously close to a former Indian Prime Minister’s similar
calculation. Unlike development expenditure where a beneficiary is deprived of benefits by
intermediaries, government, its employees and intermediaries derive the entire benefit.
Clearly, as Robert W. Sarnoff aptly remarked, “finance is the art of passing currency from
hand to hand until it finally disappears.”
CAG notes that Rs. 51000 crore transferred directly to state/district level autonomous
bodies, NGOs, etc. in 2007-08 for implementation of centrally sponsored schemes were not
fully spent. Nor could unspent balances be verified. In layman’s terms the receipt of benefits
by beneficiaries is unknown! Similarly, revenue expenditure of about Rs. 1600 crore by the
central government was classified as capital expenditure. All these call into question the
veracity of government accounts, skew government budgeting and add to deprivation of the
indigent.
Every Rs. 100000 crore provides a developmental benefit of Rs. 833 per capita per
annum to our 1.20 billion populations. Unless accounting and budgeting systems are urgently
revamped in tandem with government’s financial rules and regulations and fiscal discipline
rigidly enforced, government revenues and spending may detract from ambitious GDP
growth rates of 9%+. With the Census 2001 projecting an accretion of 400 million more
heads to India’s population by 2026, the pressures on development and revenues will
accelerate manifold while revenues shrink and non-development expenditure too accelerates.
For now Burke’s “clearness and candour of his proceedings, the exactness of his calculations,
and the solidity of his funds” is not the forte of governments in India while the rich-poor gap
widens with each passing day; so does the alienation of the rulers from their subjects. (1114
words)
The author is a senior public financial manager. The views in the article are purely
personal.
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