What did the Modi govt spend money on?

The elections for the 17th Lok Sabha are due in a few weeks and everybody is busy analysing the performance of the Narendra Modi government, which has more or less completed five years in office.

A lot has already been written on the performance of the government on the economic front using economic indicators like the gross domestic product growth, inflation, industrial production, etc. In this piece, we will not go down that lane.

One of the primary objectives of any government is to collect money in the form of various taxes and then spend that money towards the betterment of the country.

Hence, a good way to judge the performance of a government is to look at what did it spend money on. How has the Modi government done on this front?

Take a look at Figure 1. It lists out the total expenditure of the government as a percentage of the gross domestic product (GDP) between 2004-05 and 2018-19.

Figure 1 makes for a very interesting reading. The total expenditure of the central government as a percentage of GDP during the Modi years has been less than the expenditure during the Manmohan Singh years.

Does that mean that the Modi government was smaller than the Singh government? Not exactly. A lot of capital expenditure as well as revenue expenditure carried out by the current government has been moved off the budget over the last few years. This is something that the Comptroller and Auditor General (CAG) pointed out in a recent report, where it said: "Government has increasingly resorted to off-budget financing for revenue as well as capital spending. In terms of revenue spending, off-budget financing was used for covering deferring fertilizer arrears/bills through special banking arrangements; food subsidy bills/arrears of FCI through borrowings and for implementation of irrigation scheme (AIBP) through borrowings by NABARD under the Long-Term Irrigation Fund (LTIF)." It further pointed out: "In terms of capital expenditure, off-Budget financing of railway projects through borrowings of the IRFC and financing of power projects through the PFC are outside the budgetary control. Such off-Budget financing are not part of calculation of the fiscal indicators despite fiscal implications."

Let's take the case of the Food Corporation of India (FCI). It buys rice and wheat from farmers directly at a minimum support price set by the government. It then sells this wheat and rice at a subsidised price through the public distribution system. The government then compensates FCI for the losses it makes on selling rice and wheat at a subsidised price. This is done through the food subsidy allocated in the Budget. Ideally, the losses incurred during a particular year should be compensated for during that year. But that does not happen, and these losses are carried forward to future years.

In 2017-18, the FCI borrowed Rs 1,21,000 crore from the National Small Savings Fund to meet the losses not paid for by the government. Ideally, the government should have paid this money to FCI and it shouldn't have had to borrow. By not paying this money, the government managed to bring down its expenditure. It is worth remembering that government accounting works on a cash basis. Only when money leaves the accounts of the government, is it treated as an expenditure.

Now getting back to the actual expenditure of the government, what did the Modi government spend its money on?

A significant portion of the government expenditure went towards paying for the interest on past borrowings of the government. Take a look at Figure 2, which basically plots interest paid on government debt as a proportion of total government expenditure.

What does Figure 2 tell us? The interest paid on government debt had touched a high of 26.2% of government expenditure in 2005-06. After that it came down 19.5% in 2010-11 and then started to go up again. In 2018-19, it fell slightly to 23.9%. The larger point here is that a close to one-fourth of government expenditure still goes towards the payment of interest on its borrowings.

Another major expenditure for the government is the pension that it pays to retired employees. Over the years, this has gone up dramatically, as can be seen from Figure 3.

In 2004-05, pensions formed around 3.7% of the overall expenditure of the government. This has since risen to 6.8% in 2018-19. One reason for the jump is the decision of the Modi government to introduce one rank-one pension (OROP) in the armed forces. This has pushed up the pension bill of the government. Over and above this, people are generally living longer now than they did 15 years back and this has added to the pension bill.

Now let's take a look at Figure 4, which plots what proportion of the government expenditure goes towards paying salaries (including allowances and travel expenses) to its employees.

Salaries as a percentage of government expenditure peaked in 2009-10 at 9.4% of the GDP. It then fell for a few years and started to rise again. In 2018-19, salaries as a proportion of government expenditure stood at 9.1%.

And above all this there are subsidies, in particular food, fertiliser and petroleum subsidies. In Figure 5, we plot the subsidies as a proportion of total government expenditure.

Figure 5 tells us that subsidies as a percentage of government expenditure peaked at 18.3% in 2012-13. They have been falling since then, and in 2018-19 subsidies are expected to be at 12.2% of the GDP. This is a substantial fall, nonetheless as explained earlier, this is also on account of the government not paying FCI the total amount that it should.

What all this tells us is that a good proportion of government expenditure goes towards meeting regular expenditure like interest payments, pensions, salaries and subsidies. In 2017-18, 53.1% or a little over two out of every five rupees of government expenditure was allocated towards these regular expenditures. In 2018-19, it fell by 110 basis points to 52%. One basis point is one hundredth of a percentage.

Along with these regular expenditures over the last few years, the government has also had to spend a lot of money on recapitalising public sector banks. In 2009-10, the government spent no money in recapitalising public sector banks. In 2018-19, it will end up spending Rs 1.06 lakh crore on the same.

Figure 6 plots the proportion of government money spent on recapitalising public sector banks, over the years. These banks have ended up with a huge amount of bad loans, which has led to the government having to constantly investing money in these banks, to keep them going. Bad loans are loans which haven't been repaid for a period of 90 days or more. Other than public sector banks, the government also spends a lot of money to keep many public sector enterprises going.

What this tells us is that a significant portion of the government expenditure is regular expenditure, which it cannot avoid. This regular expenditure (interest payments, pensions, salaries, subsidies and recapitalisation of public sector banks) as a proportion of total expenditure of the government over the years, is plotted out in Figure 7.

It is clear from Figure 7 that regular expenditure as a proportion of total government expenditure has been going up over the years. In 2018-19, it is expected to stand at 56.3% of total expenditure in comparison to 45.8% in 2004-05. This leaves the government with a lesser proportion of money to spend on other important areas like defence, health, agriculture, etc. We have had to leave education out of this comparison simply because the way data on education is reported in Budgets post 2017-2018 makes it incomparable with the earlier data.

Let's first take defence expenditure into account. Figure 8 represents the defence expenditure as a proportion of total government expenditure.

The defence expenditure of the government as a proportion of total expenditure has gone down over the years. In 2005-06, defence expenditure made up for 15.9% of the total government expenditure. By 2018-19, this had fallen to 11.6%. It is clear that defence has had to face the cost of the rising regular expenditure.

How are things on the health and agriculture front? Figure 9 plots out the government expenditure on health and agriculture as a proportion of total government expenditure.

After remaining flat for many years, the government expenditure on health and agriculture went up in the past few years. The interesting thing is that during the first year of the Modi government, the spending on both agriculture and health touched a low 0.7% each, of the total government expenditure. After this, the allocation towards both agriculture and health went up. How did this happen? What led the government to change course was the fact that agriculture (just the crops part of it) contracted by 3.73% and 2.91% respectively, in 2014-15 and 2015-16. This led to allocation towards the social sector in general and agriculture in particular going up.

Of course, on the whole, the spending still remains low in comparison to what is required. And this is primarily because the regular expenditure of the government has expanded over the years. For the next government to be effective, it will have to figure out ways to control the regular expenditure, so that it can spend money on areas where it is actually required.

EXPENSES GALORE

• Salaries as a percentage of government expenditure peaked in 2009-10 at 9.4% of the GDP. It then fell for a few years and started to rise again. In 2018-19, salaries as a proportion of government expenditure stood at 9.1%
   
• Regular expenditure as a proportion of total government expenditure has been going up over the years. In 2018-19, it is expected to stand at 56.3% of total expenditure in comparison to 45.8% in 2004-05. This leaves the government with a lesser proportion of money to spend on defence, health, agriculture, etc.

Vivek Kaul is the author of the Easy Money trilogy