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The most important lesson we learnt about economics in the 20th century was that economies
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cannot be centrally planned.
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They run best when they are decentralized and largely free, with the state ensuring
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the rule of law and not much else.
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Millions of people, without needing to coordinate with each other, make decisions in their self-interest
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that have the effect of leaving everybody better off.
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This was most famously articulated in Frederick Hayek's 1945 essay, The Use of Knowledge
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in Society, though the lesson took decades to filter down.
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The Soviet Union eventually collapsed, and even here in India, we eventually realized
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that Nehru's vision of a command and control planned economy was a flawed one.
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Our government stuck to that mindset though, as did our people.
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That's why every year, the nation tunes in eagerly to listen to the finance minister
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summarize the budget for us.
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To find out what our rulers, our lords and masters, have planned for us.
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Welcome to The Scene and the Unseen, our weekly podcast on economics, politics and behavioral
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Please welcome your host, Amit Barma.
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Welcome to The Scene and the Unseen.
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Today's episode is about the budget presented by the government of India on February 1.
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But before we get into economics, let's talk art.
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If you are an art lover, but like me, find original work from your favorite artists a
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Remember IVM20 at Indiancolors.com, Colors with an OU.
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Now on with regular programming, I'm the editor of a magazine named Pragati at thinkpragati.com
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and we've had some excellent coverage on our site over the last weekend, even if I say
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My guests today to talk about the budget are staff writers of Pragati, Pawan Srinath and
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Pranay Kotasthane, who are joining me remotely from Bengaluru.
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Pawan, Pranay, welcome to the show.
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Thanks a pleasure to be here.
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Thanks Amit, great to be here.
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So before, you know, I don't really want to get started on a rant about how the concept
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of a budget is so anachronistic and so socialist and, you know, in times when we should really
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have moved away from all that, leaving that aside, Pawan, could I ask you for a moment
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to sort of demystify for the listener, what a budget really is?
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What is the government doing here?
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Amit, the budget is a time where actually the parliament's power shines through.
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As powerful as a government of the day might be, the executive has to table how much it
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plans to spend over the next year in front of the parliament.
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So therefore subject itself to some form of scrutiny and some amount of oxygen and sunlight
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before it can go about and do all the nasty things that governments do in their various
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hidey holes and corners.
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So the budget is an exercise where the finance minister comes out and tables what they'll
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And this time the government of India will be spending about 24.4 lakh crore rupees,
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24.4 trillion rupees, that's 18,000 rupees per Indian.
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And you know, it's about 12 to 13 percent of India's GDP.
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So that's what's on the table.
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So help me make some sense of these numbers.
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So let's say that the government of India's budget is a hundred rupees, okay.
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So that number is 24.4 trillion right now, which sounds obscenely high.
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So the, you know, none of us have human intuition about 24.4 trillion rupees.
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So supposing it's a hundred rupees, the government makes about 56 to about 60 rupees from tax
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This is the government of India's share of the GST, the government of India's share of
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income taxes, of a whole host of taxes.
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Another 10 to 15 rupees comes from non-tax revenues, right.
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This is when the government decides to sell off coal through various auctions, sale of
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spectrum or if the government decides to, you know, divest its share of various national
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companies that we have.
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So altogether the government makes about, this all adds up to about 70 rupees roughly.
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And then, you know, there are small things like the recovery of loans, some receipts
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So altogether the government makes about 74 to 75 rupees.
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The remaining 25 rupees is all borrowed.
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So that's how the number adds up to a hundred.
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And on the spending side, again, it spends on things on its own.
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You know, there are core functions of the government of India, which only it is supposed
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to do under the constitution, like defense, external affairs and so on.
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But it also spends on things that state and local governments have to do from agriculture
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to health to a lot of other sectors.
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So all of this expenditure also comes to about 77 rupees and the remaining 23 rupees goes
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back to just paying interest, right.
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And so this is something that, you know, if you're a corporation or an individual, if
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you're doing this, it sounds ridiculous, but governments seem to get away with it.
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And when sort of, you know, I was following social media today and there was the, and
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obviously we, the middle-class people on social media or even better than middle-class people
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on social media tend to sort of look at our own interests.
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And there's been a lot of talk about this cess and that cess and the cess is constantly
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I know it's a pet peeve of yours, Prane.
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Can you tell me a little bit more about the cesses in this budget and are they really
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Amit, so the government has increased the cess from 3% to 4%.
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And the cess basically is a charge which is levied for a specific purpose.
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So in this case, the government has levied, increased the surcharge for health and education.
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So what the government is basically saying is that, Hey, I was not able to spend on health
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Now if you give me more money and for that I'm going to introduce this new surcharge
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If you give me this money, I will be able to spend it on health and education.
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Now my question is that, wasn't the government supposed to do that in the first place through
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the taxes that it has collected?
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Wasn't the first charge on taxes meant for critical areas like health and education?
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So by increasing this cess, the government is admitting that it was perhaps wasting money
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on some other things that it was not supposed to.
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And now it is forced to introduce a special charge so that it can do things on critical
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areas like health and education.
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And Prane, is there actually a way to keep track of whether these cesses are being used
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for what they are supposed to be used for?
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And a sort of a larger question and something which a lot of people wonder about that, you
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know, quite apart from the budget being a statement of accounts once a year and so on
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and so forth, is there any way for taxpayers to actually, and by taxpayers, I don't just
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mean income taxpayers, every single Indian is a taxpayer in some way or the other of
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taxpayers to kind of keep track of what the government is doing with their money?
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So a good source for that is something, there is something called standing committees.
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So standing committees are basically parliamentary oversight over the executive.
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So what happens is there are very good reports which come out by the standing committee where
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the parliamentary committee meets each of those executive departments and tries to take
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a stock of how was the money used, how was it utilized, where was it not spent.
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So those are good sources to know about how the money is utilized.
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Besides that, on specific programs like NREGA or NHM, National Health Mission, etc., there
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are dedicated websites where they have tried to put information about how the money has
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been utilized over the year.
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So those are other places where people can see how the money is being utilized.
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Amit, I want to come in here a little and, you know, money is usually fungible.
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So when we talk about SESs and how they're being utilized, the reality of it is that
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the government spends on many nasty things, including, say, keeping the Air India afloat
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or keeping other public sector units afloat.
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Now, if the government were actually being honest, maybe they should call it an Air India
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SES or keep Air India flying SES and then charge that to the people.
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But they don't want to.
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World over, you have problems where people use a lottery and say that, yes, this lottery
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money that the government is running will be kept entirely for education.
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But ultimately, all money is fungible.
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I think, in fact, there should be a bloated bureaucracy, SES.
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But my next question to you, Pawan, is when you were sort of deconstructing what the actual
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budget is, you pointed out that, let's say, out of 100 percent, you know, if the budget
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is a 100 rupees, 74 rupees is actually raised through taxes and blah, blah, blah.
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And the remaining 25 percent or so is actually borrowed money, which presumably is the fiscal
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How important is the fiscal deficit and what does this budget do to address it?
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So in context in India, the financial crisis and the time around the financial crisis was
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really bad for the country, not because of the crisis as such, but because of other things
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that happened here, which included the universalization of NREGA, the latest pay commission coming
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and hitting people, you know, multiple things combined.
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What started happening was the government started borrowing about six percent or so
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of GDP, rather that the expenditure of the government of India became that much higher
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compared to what it was earning.
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And that became so high.
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And once the government starts borrowing so recklessly, the cost of borrowing goes up.
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So there are a few market mechanisms by which the governments will have to start feeling
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And from around 2011 or so, there has been this long but slow process of trying to have
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the government of India borrow slightly less each year.
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Because you know, bureaucracy is being what they are.
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It's very hard for governments to just slash funding across the board very easily.
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So they've been trying to reduce this over time.
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So now the fiscal deficit last year stands between three point five and three point seven
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Now this again, because it's a small percentage number, it doesn't sound like much.
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But every one percent of GDP is about 18 to 19 trillion rupees.
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So that's about 250 something billion dollars.
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So now when we're talking about this, even point one percent of the fiscal deficit is
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So point one percent is 18,000, 19,000 crores, point one percent is three billion dollars.
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So so that's the number that we are playing with.
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Now in general, it's not a bad idea to borrow money if you are trying to invest it in the
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So if you were borrowing money because you wanted to invest in an office, invest in,
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you know, a setup which would give you a return over many years, you know, somebody might
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give you the loan for one.
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But if you were taking a loan to replace your salary, to take care of day to day expenses,
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then the bank would laugh at you.
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Unfortunately, what's happening in India is that the within the fiscal deficit, there
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is a large revenue deficit where the government is not able to meet its revenue day to day
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expenditures from salaries to other things.
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And that is not being met right now by taxes.
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So the government of India is that profligate.
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Just for context, our state governments are much, much better at this.
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They don't run revenue deficits, but surpluses.
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They by and large borrow to invest.
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How are the incentives different?
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I think with the state governments, the central government, the union government gets to have
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And I think states by and large somehow stuck to this discipline a little better so far.
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But the central government, look, you have this thing called the Fiscal Responsibility
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and Budget Management Act, FRBM, which tries to bring in some controls of discipline where,
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you know, it is not as simple as the government just printing new notes, but the RBI comes
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in and steps in a few ways to give it some accountability.
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But you know, this is not yet working as well as it should.
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And has this budget taken any steps to making the fiscal deficit less or treating it as
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No, in fact, it's one of those cases of shifting goalposts.
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Every year, there is a new reason for why the fiscal deficit should not get reduced.
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Right now, I think the talk of it is how you don't have the private sector investing in
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the economy because there is a huge amount of private debt that is what's called the
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twin balance sheet problem where, you know, the banks are indebted, the private sector
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So, there is a call for the government to take that leap forward and invest.
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You know, every year, there is some other reason for the governments to not cut down
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on spending as much as they should.
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But that's what usually happens.
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Amit, if I can come in, actually, in the last year's budget, the government had said that
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it would stick to the 3% fiscal deficit target.
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But from the revenue estimates which come in this year's budget, it shows that they
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have clearly breached that target that they had set for themselves.
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And even this year, we can expect that they will not be able to meet the 3% target.
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It will, like Pawan said, it will go up to 3.5% or even more.
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And the biggest thing that we should realize here is that even today, the single largest
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component of government spending is actually on interest payments.
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So this is interest we are paying for loans we accumulated from long back, which means
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that if this continues for future generations, the government will not be able to spend more
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on things like health and education, but a greater component will keep going out as interest
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That's the biggest problem why we should be very, very wary of what happens to the fiscal
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And that becomes a bit like a vicious circle.
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And in a sense, you know, the paradox here is if you think about the incentives of the
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politicians involved, the incentive of the politician is always to win the next election.
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And a budget is a great opportunity to hand out stops to this sector or that sector or
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this group of vote bank, this group of voters or that vote bank and so on and so forth.
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And you know, a fiscal deficit that keeps growing is essentially a cost that your children
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It's a cost on the future.
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So the easiest thing to do, therefore, really for any government is to kick the can down
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the road and, you know, rationalize having a large fiscal deficit in some way or the
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other, as Pawan pointed out, and and just spend a lot on appeasing whoever you're trying
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I think the only little discipline that comes in is through various kinds of ratings of
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For example, that's why the government of the day is so concerned about what Moody's
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has to say about us, because there is a direct influence on the cost of borrowing.
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Because every year the government wants to borrow, there is at least a little bit of
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sensitivity to the cost of borrowing today.
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So that injects the tiny amount of discipline or negative incentive over there.
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And clearly, that is not sufficient most of the time.
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If I can come in, Amit, this is not a problem unique to India, right?
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But other countries have tried to fix this problem of profligacy through establishment
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of something called fiscal councils, like the US has its own CBO sent budgetary office,
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and then Australia also has an arrangement like this, the what they tried to do is this
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is an independent committee which tries to keep a track of the promises that government
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is making and they try to come out with estimates to say that, hey, if you have made this promise,
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do you actually have the budget for fulfilling this promise or not?
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And these are reports which are put out into the public domain, so that people have better
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information about the promises being made.
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And it tries to restrict the government officials from going overboard and promising things
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for which money has not been budgeted.
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Speaking of promises being made, Pawan, one of the big promises that has been made in
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this budget and that everybody is going to go about are the health guarantees, almost
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sort of people hyping up a future universal health care and so on.
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But the actual allocations in the budget don't reflect the rhetoric of Mr. Jaitley on this.
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Yes, and rhetoric gets lapped up so quickly, there are people who are already calling this
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Modi care, whereas currently it's a couple of sentences in the budget speech, there's
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actually very little reflection even in the budget documents.
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So this idea of a national health protection scheme, I think as Vivek also wrote in Prakriti
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recently has been bouncing around for a while.
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But what the finance minister essentially promised is that 100 million families, that
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is about 500 million people will come under this health insurance net of some sort, where
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each family gets a health insurance cover of about 5 lakh rupees per year.
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And this entire thing will be financed by the government of India, and without mentioning
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exactly where the money is coming from.
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As Pranay mentioned earlier, there have been tweaks with the SES, so an old education and
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higher education SES has been renamed as an education and health SES, and this has been
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increased from 3% to 4%.
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Now the government estimates an extra 11,000 crores coming in, with 11,000 crores you can
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do nothing, with 11,000 crores you're essentially allocating 1100 rupees per family.
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And you tell me what kind of health insurance can be available for a full family for just
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1100 rupees a year, with whatever economies of scale working, they're just much, much
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smaller than what private health insurance costs are in India today.
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So again, this is a case where if India had an independent fiscal council of some sort,
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they would have fisced this themselves, but sitting outside it's harder to do these estimations
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on behalf of the government, but it's clear that a scheme as grand as this, while perhaps
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necessary, given that so many Indians spend for health care out of pocket and often as
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a result slip back into poverty, it's just not going to take off because the monies for
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Pranay, one of the balancing acts that a budget often has to pull off is that on the one hand
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it's supposed to be a sign of good governance, but on the other hand, the government in power
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is often more concerned with optics than with governance, especially with elections coming
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up as it happened to be.
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This has been a constant criticism of the Modi government and even I've made it in the
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past that they care more about optics and governance.
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Where does this budget fall on that, you know, on that difficult question of balancing these?
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Yeah, I think one of the good things that the budget did was basically, finally there
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is a realization that the government's business is not to be in business.
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So they are sort of trying to get do more of divestment and they have listed up 24 companies
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which they plan to divest.
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So that is sort of trying to reset the balance and earn more revenue for the government without
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So that if this gets done and it will be again a politically sensitive move, it would be
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a move in the right direction.
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So but Avitam Pranay, one of the things that is there in almost every budget speech and
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it doesn't really matter which government it is, this government is quite guilty, is
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that grand announcements are made and the budgetary allocations of it are nowhere near
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So one of the announcements made along with this national health protection scheme was
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a case where the government said that they will start 1.5 lakh wellness centers across
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So these are not just primary health centers, but they'll help you with diagnostics, primary
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health, tertiary health, all kinds of magical things.
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But for the entire thing, the government has allocated an amount which translates to 80,000
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Nothing is possible with 80,000, probably they can build the building and keep the electricity
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on and maybe put one person there and that's all that's possible.
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And this is just one example.
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There's another where the government talks about how there are these rural huts of some
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sort which should be transformed into grameen agricultural markets whereby farmers don't
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have to go 100 kilometers away or so to sell their wares at an APMC, but can sell locally.
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But for these 22,000 grameen agricultural markets, there is a corpus fund of 200 crores
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Now this is a corpus and you're taking interest on it, you're talking about just 200 crores
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and you want to use that for 20 plus thousand things.
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So you're talking about a couple of thousand rupees that you can spend per market.
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So it's these kinds of numbers that beggar our belief and they just don't add up.
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And Pranay, one of the points you made in the past and you've written about this for
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Prakriti as well is one of your pet suggestions is that the government should just have 10
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centrally sponsored schemes and not the vast numbers that they do now.
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Can you elaborate a little bit on that?
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And has this budget done anything to address that?
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Yeah, the budget has not done anything to address that actually with this national health
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In fact, there will be increase in the number of centrally sponsored schemes.
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Why I tried to argue for that was because see the constitutional responsibility for
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most of the social sector expenditure actually lies with the states by which it is meant
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that for anything to do on health or on education, the union government has to collaborate with
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So even when the union government allot some money, it actually first goes to the states
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and then the state governments implement it.
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So my point was that if state governments are responsible for most of these social sector
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expenditure, isn't it better that the union government just gives a lot of money in the
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form of cash to these state governments and then the state governments decide based on
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their priorities and their preferences where to invest.
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And this would require the union government to actually reduce the number of centrally
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sponsored schemes where it tries to direct that, hey, you should only spend money in
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this area or not spend in that area.
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Instead of that, the union government can consolidate the expenditure into a couple
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of areas, health, education, defense, et cetera, and leave the rest of the expenditure as money
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for the states to invest based on their own priorities.
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So let me wrap it up by asking two questions to each of you.
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The same two questions, Pawan, you go first, which is that in what ways has this budget
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made you happy and disappointed you?
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That's the first question.
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And the second one is what would you do differently?
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Not in terms of specifics, but in broader directional terms.
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Amit, I really don't know how to be happy at the end of a budget.
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Sometimes the noise seems right, the sound seem right, but you don't really see them
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backed up with the right kind of numbers.
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And really after you see a few budgets, there's like a tyranny of low expectations, you know,
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so it can be bad or it can be truly abysmal and horrible and there's really nothing else.
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In terms of what I would recommend would be done differently is we need to fundamentally
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reform the budgeting system and process.
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It's high time that the government of India not adopt standards that, you know, it imposes
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We need accrual accounting.
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The government thing is not just about cash coming in and going out, but about assets
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and liabilities that the government has and how best it's utilizing them and how best
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So I think we need to go beyond just this cash accounting that we have and talk about,
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you know, the Indian state or the country of India has a certain amount of wealth.
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Some portion of it is owned by the government.
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India as a society has debts too and some of it is with the government and we really
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need to be starting to talk and think about that rather than is it 24.4 lakh crores or
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Yeah, Amit, I think one thing that disappointed me was basically the elephant in the room
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really is the lack of jobs in India.
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And I don't think there's enough in the budget where things are being done to see this as
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an emergency right now.
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So the way the government is trying to do things is saying that we will increase customs
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duties on electronics and they explicitly say that this will increase jobs because our
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industries will become more competitive.
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Now this is good old style import substitution and this is in no way going to increase jobs.
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In fact, it is going to hurt our industries because we anyways import things from outside.
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We don't produce some of the things which go into electronics.
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So these are small things which the government is trying to do and say that doing such things
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will help us increase jobs.
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But the bigger question of increasing economic growth, facilitating smaller companies to
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grow such that and also creating bigger companies so that they can provide jobs at a larger
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scale are things that are still left untouched.
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So that is sort of disappointing.
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And if I were given a chance, as I said, I would just reduce the number of schemes that
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the government of India runs and give a lot more freedom to the states in implementing
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these government expenditures.
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You know, if I can go one step from what Pranay said, I think it's time to end a lot of government
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India does not need a ministry of health.
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We don't really need a ministry of human resource development.
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We might need other centers, other bodies there instead of those ministries, but they're
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And to cycle back to what you said earlier Pranay, that supposing you expected the government
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to signal its concern for the jobs crisis that is already upon us.
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What could it have done differently in this budget?
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The thing that could be done differently is basically reforming the factor markets, basically
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changing how land, labor, etc. can exchange hands is the big deal here.
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And that has been written about ad nauseam by lots of people about how India needs to
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reform these factor markets.
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Unless that is done, we are only talking about tweaking at the margins and we will not be
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able to create jobs at a bigger scale.
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Thanks a lot for coming on the show, guys.
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If you enjoyed listening to the show, head on over to Pragati at thinkpragati.com.
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Our budget coverage is available at thinkpragati.com slash categories slash budget dash 2018.
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You can follow Pawan on Twitter at Zeus is dead and you can also listen to him on the
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You can follow Pranay at Pranay Kutas.
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You can follow me at Amit Verma, A-M-I-T-V-A-R-M-A. For past episodes of the Scene and the Unseen,
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do head on over to sceneunseen.in Goodbye for now.
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If you enjoyed listening to the Scene and the Unseen, check out another hit show from
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Indusworks Media Networks, Cyrus Says, which is hosted by my old colleague from MTV, Cyrus
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You can download it on any podcasting network.
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He bends down to test the warm water for his bath.
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He comes here to quench his thirst for a hot shower and some podcasts.
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You can witness how he enjoys having other people talk about cool stuff in his bathroom.
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Indeed, it helps him with his loneliness.
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You can find more of his PCs on ivmpodcast.com, your one stop destination where you can check
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