High on vision but what about the budget numbers?
Premium- We must aim for higher non-tax revenues so we can spend more on things beyond interest payments
Finance minister Nirmala Sitharaman’s budget speech read like a pitch made to a venture capitalist by a startup looking to become a unicorn. It was high on vision, but low on numbers. And it’s numbers that ultimately make up any budget.
So, what do the budget numbers tell us? Let’s start with a simple question. What does the Centre spend the maximum amount of money on? Salaries? Pensions? Education? Roads?
It spends the most amount of money on paying interest on its total borrowings to fund the fiscal deficits it has run over the years. The fiscal deficit is the difference between what it earns and what it spends. In 2022-23, the government expects to pay ₹9.41 trillion as interest payments. This amounts to 3.6% of the gross domestic product (GDP) forecast for the year.
Interest payments expressed as a proportion of GDP do not reveal the real picture. A better way to assess the situation is to look at interest payments as a proportion of the net tax revenue earned by the central government.
In 2022-23, as against interest payments on debt of ₹9.41 trillion, net tax revenue is expected to be ₹19.35 trillion. Hence, interest payments amount to 48.6% of the net tax revenue.
In 2021-22, they were at 46.1%. While these numbers sound quite extreme, the country has seen worse. In 2001-02, more than 80% of the net tax revenue went towards making interest payments. After that, the proportion fell and stood at 41.1% in 2010-11. It was at 42.6% in 2017-18 and 50.6% in 2020-21.
Hence, despite a significant jump in tax collections this year, over the next few years the government is likely to end up spending around half of its tax revenues on paying interest on its borrowings. Given this, it needs to look at increasing what it earns from other sources, everything from disinvestment of its stake in public sector enterprises to the dividends it receives from them. This will help the government meet its expenditure without a massive increase in borrowing. In 2022-23, the government expects to borrow ₹11.6 trillion to fund its fiscal deficit. The other option is raising tax rates, which is a bad idea given that the country is still recovering from the ill effects of the covid pandemic. Thankfully, the government didn’t raise tax rates in the budget.
So, it’s a good thing that the government plans to disinvest its stake in the Life Insurance Corporation (LIC) of India before the end of this financial year. In the revised estimates for 2021-22 presented, the government has assumed that it expects to earn ₹78,000 crore through disinvestment. Given that it had earned only ₹9,364 crore through this route up until December and that no other big stake sale is on the cards, it suggests that the LIC disinvestment should happen before March. Finance minister Sitharaman did say in her speech that LIC’s public issue is “expected shortly".
Without the disinvestment of LIC, the government would have had to resort to more borrowing this year. This would have led to more tax revenue being spent simply on meeting interest payments in the years to come. And more money being spent on interest means less money being spent on other important things.
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When it comes to disinvesting its stake in LIC, the temptation to price the sale expensively will be high, given that unlike many other companies that raised money from the stock market recently, LIC is a fully-functional profitable business. As of 30 September 2021, it had invested policyholder funds worth ₹37.72 trillion.
Disinvestment of the Centre’s stakes in public sector companies should continue to be an important way of earning revenue in the years to come. In an environment where the negative economic impact of the pandemic is likely to stay for the next few years, the government will have to keep spending more to put more money in the hands of people, directly and indirectly.
Hence, if the government prices its stake sale in LIC expensively, it could have trouble selling its stakes in other public sector companies in times to come. It’s important that it leaves something on the table for prospective investors as well.
Given this, it should avoid what economist Thomas Sowell calls the “one day at a time" approach of doing things and take the bigger picture into account. The government can learn from what the British government did in the 1980s, when it went about privatizing government-owned companies, including British Telecom (BT). The shares of BT were not expensively priced, which helped the government create the momentum necessary for the future sale of companies like British Gas and British Steel. Further, India’s government needs to be slightly more aggressive on the disinvestment front. The target for next year has been set at ₹65,000 crore, which is lower than this year’s ₹78,000 crore.
Other than stake sales, the government also needs to look at other ways like land sales in order to drive up its total intake. The other important thing that could be done to bid up the value of the shares of public sector enterprises is to let them be run professionally instead of being controlled by the bureaucracy.
Vivek Kaul is the author of ‘Bad Money’.
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