Where does your tax money go? How does India Spend Money?

A simple read to understand how the Indian government spends money.

Please read my previous article if you are interested in knowing how India earns money.

THE UNION BUDGET

To understand how much money India makes and how it spends the money, it is important to first understand the Union Budget of India and its significance.

As per Article 112 of the Indian constitution, the Budget is presented by the Finance Minister at the parliament at the beginning of every financial year.

The Budget contains projected earnings & spending for the upcoming fiscal year , the revised estimates of the current year plus the actuals of the previous year. The Budget must be approved by the parliament.

For example the Union Budget presented on Feb 1 , 2021 consists of :

• Projected earning & spending Numbers for 2021–2022 (April 1st, 2021 — March 30th 2022)
• Revised estimates of 2020–2021 that were projected when the Budget was presented on Feb 1, 2020. (April 1st 2020 to March 2021)
• Actual Numbers for 2019–2020(April 1st 2019 to March 2020)

Where does the government spend its money?

The Indian government spends money across a multitude of areas like subsidies, defence, pensions, central & sector schemes, interest payments etc…

Let us look at the Indian government’s 2021–22 estimated expenditure breakup across the different categories:

Interest Payments: This is the interest the government pays on all of of its outstanding debt. This makes up about 20% of the expenditure as per the governments estimate doe 2021–22 . Let us see how this trends over the last decade.

State Share of Taxes & Duties:

The tax revenue collected by the centre is divided between the centre and each of the states as decided by the Finance Commission. The finance commission is a constitutional body set up by the President of India to decide the share of the Union & state governments in the tax revenue pool. It also decides the share of each state.

Central Sector Schemes

These are schemes that are directly funded and executed by the central government. The resources allocated to these schemes are not transferred to the states. For example : LPG connection to poor households, family welfare schemes, Metro projects etc…

Finance Commission & Other Transfers

In addition to the state share of taxes and duties, the finance commission also provides finance commission grants and other transfers to the states.

Finance Commission Grants : Grants for sent to local bodies namely rural local bodies, urban local bodies, state disaster relief fund and post devolution revenue deficit grants. Post devolution deficit grants are a mechanism by which states can be compensated for any loss after the states receive their share of the tax pool.

Other Transfers: Assistance to the states from the NRDF(national disaster relief fund), externally aided projects grants & loans, central pool of resources for north east region & Sikkim, etc…

Central Sponsored Schemes

These are schemes that the centre comes up with but are implemented by the state governments. The funding also is shared between the centre and states with the centre bearing the larger share. For example : Swachh Bharat Mission, National Health Mission etc…

Subsidies

The discount given by the government to make essential items available to the public at affordable prices. As a majority of our population is below the poverty line, the goal is to keep essential items within reach of poor people. They are given in various sectors like agriculture, food, education , oil , public transport etc…

As we can see the subsidies was on a downward trend but 2020–21 had a huge spike due to the increase in food subsidies(approx. 300%) the government had to give due to the covid pandemic.

Defence

The money that the government allocates for the Indian Armed Forces. It finances salaries, training, purchase & maintenance of equipment & facilities, new & ongoing operations, development of new technologies etc…

Pensions

The money allocated by the Indian government towards pensions and other retirement benefits.

Overall Expenditure

The trend of overall expenditure shows a gradual increase between 2008 to 2020. Like all the other trends, 2020–21 shows a sharp increase in spending due to the pandemic, but looks like the government is estimating to not increase the spending in 2021–22 as indicated by the straight line between 2020–21 & 2021–22.

My curiosity around how our(Indian) government spends money led me down this path of looking into India’s expenditure. I hope it help others with the same curiosity.

The data shown in this article has been obtained from the Government of India Budget Documents.