EY analysis of Indian Union Budgets of the past 10 years

 The analysis of Union Budgets from 2015 to 2025 highlights significant shifts in public expenditure priorities and the management of tax revenues, particularly concerning their impact on productivity and utilization.

Effect of Public Expenditure on Productivity

The GoI has made a conscious effort to progressively create space for capital expenditure expansion, recognizing its crucial role in driving growth and productivity. This strategy is visible across several budgets:

• Increased Capital Expenditure: From FY15 to FY26 (Budget Estimate), GoI's capital expenditure as a percentage of GDP increased by 1.56 percentage points, rising from 1.58% to 3.14%. As a share of total expenditure, capital outlay nearly doubled from 11.8% in FY15 to 22.1% in FY26 (BE). This augmentation was financed almost equally by revenue enhancement and expenditure restructuring, including a 0.72 percentage point fall in revenue expenditure relative to GDP.
• Focus on Infrastructure: The increase in capital expenditure has largely favored non-defence capital expenditure, which is closely linked to infrastructure development. This category reached a peak of 2.15% of GDP in FY24. The National Infrastructure Pipeline (NIP) and GatiShakti initiative are key programs aimed at accelerating infrastructure spending, with the objective of providing a strong foundation for medium-to long-term growth.
• Multiplier Effects: Public expenditure, especially capital expenditure, is recognized for its higher multiplier effects on output and employment compared to revenue expenditure. An RBI study estimated the central government's capital expenditure multiplier at 2.45 in the first year and 3.14 in the second year, with non-defence capital expenditure having even higher multipliers (2.10 impact, 3.84 peak).
• Quality of Fiscal Deficit: There has been a consistent improvement in the quality of fiscal deficit since FY21. This indicates that a larger proportion of government borrowing is now being used for capital asset formation rather than revenue expenditure, which directly supports productivity and long-term growth. The share of capital expenditure in fiscal deficit increased to 57.4% in FY24.
• Incentivizing States: The central government has also encouraged state governments to increase their capital expenditures through measures such as earmarking portions of grants for capital asset creation and providing 50-year interest-free loans. This is critical as many infrastructure projects fall under state supervision.
• Growth Stimulus: Budgets have aimed to stimulate growth by supporting aggregate demand, focusing on job-creating sectors with high multiplier effects like infrastructure, construction, agriculture, and health. While there was a heavy reliance on fiscal stimulus during the COVID-19 crisis, particularly in FY21, the subsequent efforts focused on restructuring expenditure to prioritize capital formation.

Share of Tax Revenues and Its Utilization

The sources provide a detailed account of the trends in tax revenues and how they have been utilized to support fiscal reforms and economic objectives:

• Combined and GoI's Tax-GDP Ratio:
  • India's combined tax-GDP ratio, which had historically hovered between 16% and 18%, shows signs of breaking this ceiling, increasing by over 2 percentage points from FY15 to FY24. It reached 18.5% in FY24 and is projected to rise to about 23.5% by FY48.
  • The GoI's Gross Tax Revenue (GTR) to GDP ratio increased from 10% in FY15 and FY20 to 11.7% in FY24.
  • However, the trend growth rate of GoI's GTR has been declining since FY08, falling to 4.8% by FY22 (BE). A sustained increase to 10% or above is needed to reduce reliance on larger fiscal deficits.
• Composition of Tax Revenues:
  • Direct taxes are expected to contribute more significantly to the overall tax-GDP ratio going forward. Corporate Income Tax (CIT) reforms in September 2019 reduced rates, leading to an initial contraction in CIT revenues in FY20 (-16.1%). However, CIT revenues have since recovered, showing high growth and buoyancy in subsequent years.
  • Goods and Services Tax (GST), introduced in July 2017, initially resulted in lower growth and buoyancy due to the rate structure not being revenue-neutral and the initial emphasis on lower rates in the GST Council. The effective weighted average GST rate declined from 14.4% in May 2017 to 11.6% in July-September 2019.
  • Union Excise Duties on petroleum products have played a role in compensating for revenue losses from CIT reforms, with their share in GTR increasing to 15.1% in FY22 (BE) from 11.2% in FY19.
• Share with States: The recommendations of the 14th Finance Commission led to a sharp increase in states' share of central taxes from 32% to 42%. However, the actual effective share of states was often lower (e.g., 28.9% in FY21 (RE) and 30.0% in FY22 (BE)) due to the increasing role of cesses and surcharges, which are not shared with states. This effectively reduces the divisible pool for states.
• Non-Tax Revenues (NTR):
  • NTRs have generally languished in the 2-3% range of GDP over a long period, which is low compared to other selected countries. These revenues originate from government ownership of financial and physical assets, as well as services provided, often with less than their full potential realized.
  • Key initiatives to augment NTR include spectrum sales and the National Monetization Pipeline (NMP) for monetizing government and public sector-owned assets, including defence assets. The NMP aimed to monetize assets worth INR6 lakh crore from FY22 to FY25, with high achievement rates.
  • RBI dividends are a significant, albeit volatile, component of NTR, showing periodic jumps that can influence government revenues.
• Utilization of Tax Revenues:
  • Tax revenues, along with non-tax revenues and non-debt capital receipts, are the primary sources for financing government expenditure.
  • A significant portion of revenue enhancement, including increased tax-GDP ratio, has been used to create fiscal space for augmenting capital expenditure and supporting the shift towards an investment-led growth strategy.
  • The need to adhere to Fiscal Responsibility and Budget Management Act (FRBMA) targets has often led to the burden of fiscal deficit reduction falling on expenditure curtailment, particularly revenue expenditure and subsidies.
  • Despite increased borrowing, especially during the COVID-19 crisis, a significant portion of additional funds was sometimes directed towards revenue expenditure, highlighting challenges in fully directing resources towards asset-forming capital expenditure. For instance, in FY20 and FY21, approximately 80% of additional borrowing financed revenue or non-asset forming expenditure.
  • Subsidy reforms, including better targeting and delivery through Direct Benefit Transfers (DBT) leveraging digital infrastructure, have led to a steady reduction in major subsidies as a percentage of GDP, falling from a peak of 3.57% in FY21 to 1.16% in FY25 (BE).
  • Interest payments constitute a significant and growing portion of government expenditure and revenue receipts (e.g., 42.7% of revenue receipts in FY23), particularly due to higher debt levels incurred during the COVID-19 period. Reducing the debt-GDP ratio is expected to lower interest payments, freeing up fiscal space for productive spending.
  • The abolition of the plan-non-plan distinction in expenditures (FY15 onwards) aimed to improve efficiency by preventing undue prioritization of new asset creation over essential maintenance.
  • Increased budgetary transparency, including bringing off-budget borrowings (like FCI's borrowing from NSSF for food subsidies) onto the government's books from FY21 onwards, has improved the accuracy of fiscal deficit reporting.

Overall, the Union Budgets from 2015 to 2025 demonstrate a strategic reorientation towards an investment-led growth model, funded by both tax revenue growth and structural expenditure reforms, while also prioritizing fiscal consolidation and transparency. However, challenges persist in consistently achieving tax buoyancy, managing the share of tax revenues with states, and fully directing all borrowed funds towards productive capital expenditures.