In the past two decades, India has seen phenomenal changes in its economy. Economy was opened up under IMF pressures during 1991. The three critical components of this were liberalization, privatization and globalization. Moreover, India saw unprecedented growth of IT services and also a partial bust in the period of 2002-03. One of the most important tools in managing changes in economy and making growth sustainable is government expenditure. But, is all government expenditure defined by government policies or is there a weight of history. This report tries to analyze the long term impacts of policies government layouts. Few interesting findings include 1) Increasing burden of interest payments; 2) Despite promises of better infrastructure, dwindling comparative expenses on Capital formation; 3) Increased subsidy bill despite the globalization effort; and 4) Decreasing defense bill which is a relief despite an unstable neighborhood and a mini war in 1999.
Since its external crisis of the early nineties, India has witnessed a turnaround on most indicators of macroeconomic performance. The process of economic reform, including widespread liberalization and reduction in protectionism, launched in 1991, and steadily pursued thereafter has yielded positive results by eliminating some longstanding structural rigidities, and created potential for higher growth. Over the last decade or so India has made the transition from an onerous trade regime to a market-friendly system encompassing both trade and current payments – IMF Article 8 compliance was, at last, achieved. There also was some liberalization of cross-border capital account transactions, although significant constraints remain in place on cross-border inter temporal trade and cross-border risk trading.
InterestIn 1999, the single largest item of expenditure, accounting for almost one third, or Rs.88,000 Cr. (US$20 billion) of central Govt. Budget is taken by interest repayments on the public debt burden. If the principal repayment due on the debt is added to this (what is called "debt servicing"), the total is Rs.195,000 Cr. or US$46 billion. This Rs.88,000 Cr. in interest expenditures is not just the largest and most significant portion of the entire budget, but it is also growing at a faster rate than any other item. Just to put numbers to this, if you take the nine budgets that have been presented from Manmohan Singh's first budget in 1991, to Yashwant Sinha's budget, debt servicing has multiplied by 2.3 times, while the overall expenditure has grown by 1.5 times. Outside of the OECD, India is one of the world's largest debtor countries, with a total external debt at around US$100 billion. It is obvious in the least that this US$20 billion annual burden being taken out of the economy could be put to, in looking after the welfare of the people.
By the time of independence, the external debt of India was relatively small. In 1951, the total external debt was of the order of Rs 32 Cr, or around $67 million. By 1961, following the first two plans, this had grown to $1.6 billion. By 1971, this multiplied manifold to$8.7 billion, by 1980, $18 billion. Between 1980 and 1990, the debt multiplied from $18 billion to $70 billion. And in the ten years since then, it has advanced steadily to the $100 billion mark.
The rising burden of interest payment on Indian budget that has reached the alarming proportion of one third of Indian total budget expenditure. The steep rise in interest expenditure during 1980 – 2000 is due to fiscal deficit financing through borrowings both internal and external. During this period the interest expenditure crossed total capital expenditure.
DefenseThe Union Budget 2008-09 allocated Rs.1,05,600 crores, for defense. With the new budget, India's defense spending has risen by nearly 125 per cent in current prices over the last one decade from Rs.47,071 crores in 1999-2000. The increased allocation over the years comes at a time when the Indian economy is growing at an impressive rate. What is important is that the present economy is more globalized than before. As the economy grows further and becomes more globalized, the need for maintaining the growth momentum and protecting the economy's global character simultaneously increases. The least that India wants at present, in the face of increasing signs of a global economic slowdown and its adverse impact on the Indian economy, is a disruption of the current momentum due to its adversaries. To meet any threats to its vital interests India requires, among others, a strong military capability that could safeguard its interests within and outside domestic boundaries, including in the vast seas that account for 70 per cent of the country's total trade by value. If India's present maritime capability is any indication, it is inadequate to protect its merchant ships that carry nearly 90 percent of India's traded goods by volume. So the bottom line is: India needs enhanced maritime capability, which, in turn, demands higher allocation.
The higher allocation for defense, given its close links with military capability, has the added advantage of projecting India's hard military power. However, an analysis of India's military spending, through the prism of its share in Gross Domestic Product (GDP), does not convey India's active intention to showcase its military ambitions. This is apparent because the proportion of economic resources devoted to defense has continuously fallen in the last half decade or so. In fact, the latest defense budget as a proportion of GDP has, for the first time, fallen below 2 per cent since the India-China war in 1962, and from a high of 2.46 per cent in 2004-05.
The declining share of defense in GDP and its possible adverse impact on military capability may be little misleading given the fact that India's military capability-related spending, coming under the 'capital expenditure' of the budget, has increased significantly, from less than 25 per cent to more than 45 per cent over a decade. However, from the international perspective, India's defense spending is on the low side.
From a global perspective, India's latest defense budget, estimated at roughly US$26.5 billion at the current market exchange rate, constitutes a mere 2 per cent of the total world military expenditure. While the US, with a military budget of more than US$700 billion, remains the world's largest military spender, it has devoted over four per cent of GDP to defense, which sets the yardstick for 'affordable defense' by other countries. Against this yardstick, Pakistan spends around 3.5 per cent of its GDP on defense, and China spends nearly 4.3 per cent. In contrast, India's defense budget is only 1.99 per cent of the expected GDP for the coming Fiscal Year.
Capital FormationThe capital formation in India has stagnated during the period of study ~ INR 150 bn per year. This stagnation could be explained by the following reasoning. The period of stagnation is 1980-1998. During this period Indian economy grew at a very moderate pace of ~3.4%. To meet fiscal deficit Indian government took excessive loans. Though fiscal deficit is usually financed through currency printing, but as India in that regime strictly controlled exchange rate it took the route of borrowings.
