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Incongruence between Announcements and Allocations

Ajit Karnik ( teaches at Middlesex University, Dubai. Mala Lalvani ( teaches at Mumbai School of Economics and Public Policy, Mumbai University.

A scrutiny of the Indian economy and the state of public finances reveals that while there are a few areas of improvement under the current government, the economy remains fragile and, worryingly, the situation has worsened in some other respects. It was hoped that the Union Budget 2018–19 would take measures to address some of these concerns but these expectations have been belied. Budget 2018–19, possibly with an eye on elections, has made grand announcements instead of taking hard decisions and making adequate allocations towards key sectors of the economy.

The authors would like to thank Manali Phatak for excellent research assistance.

The Finance Minister, Arun Jaitley, in his Budget Speech 2018–19, has been quite effusive in praising his own government’s performance over the past four years. Specifically, he mentions: (i) India’s high economic growth rate; (ii) rising foreign direct investment; (iii) improvement in the ease of doing business; (iv) a significant improvement in the growth of the manufacturing sector; and (v) rising exports. The finance minister also takes credit for the improvement in public finances.

The finance minister and the National Democratic Alliance (NDA) government, in general, have been at pains to point out that the economy is now in a much better shape than it was under the previous United Progressive Alliance (UPA) governments. It is worth examining some of these claims of the government to see whether these stand up to scrutiny.

State of the Indian Economy

In this section, we examine the performance of the Indian economy over four regimes: NDA-1 (1998–99 to 2003–04), UPA-1 (2004–05 to 2008–09), UPA-2 (2009–10 to 2013–14) and NDA-2 (2014–15 to 2017–18). We will see, in what follows, that, while there is a clear improvement in the performance in some aspects of the economy, there is a worsening or little change in some others during the last four years.

A clear improvement that can be seen is in the rate of inflation (Figure 1). It may be noted that in most graphs presented below, there are vertical lines/bars for various years. These bars refer to averages for the government that has just completed its term. Starting from the left, the first bar refers to the term of NDA-1; the second bar refers to UPA-1; the third bar refers to UPA-2 and the fourth bar refers to NDA-2.

Figure 1 shows that, after rising to an average of 10.41% during UPA-2, the rate of consumer price inflation (base year 2012=100) has reduced to 4.93% under NDA-2. This is an ambiguous sign that the Reserve Bank of India has been able to curb the inflation rate, though, in fact, UPA-2 functioned under some of the highest international crude oil prices. The average crude oil price during the UPA-2 regime was $96 per barrel which fell to $58 per barrel during the NDA-2 regime, a decrease of 39.5%. We estimated a simple regression of log (rate of inflation) on log (crude oil prices) and time trend to examine this relationship between crude oil prices and inflation.1 Given the estimated equation, a 39.5% decrease in crude oil prices translates into decrease in the inflation rate of about 38%. Given the average rate of
inflation of 10.41% during UPA-2, the fall in crude oil prices would have reduced the inflation rate by about 3.33 percentage points.

One area where the NDA-2 government can claim credit for is the improvement in India’s ranking in the Ease of Doing Business (EODB) index. Starting with a rank of 116 in 2006, India’s rank worsened to 134 at the end of the UPA-2 regime and, in 2017, had improved to 100. In recent months, in the wake of Paul Romer’s questions about EODB methodology, doubts have been raised about the sudden rise in India’s ranking. It has been suggested that “India’s celebrated rise in the Doing Business rankings turns out to be mostly an artefact of methodological changes” (Sandefur and Wadhwa 2018). Further, the usefulness of this ranking is limited since it depends not just on the performance of India but also that of other countries: if other countries perform worse, India’s ranking improves. Hence, it is better to examine the Distance to Frontier (DTF) measure computed as a part of EODB (World Bank 2018). Figure 2 shows the DTF related to starting a business in India. The closer is the DTF score to 100, the better the performance. It can be seen that India’s DTF has been improving continuously but this is not reflected in India’s ranking.

However, despite the improvements noted above, there are clearly areas of concern for the Indian economy. The next few figures show the performance of the real economy. Figure 3 shows that rate of growth of output has languished below the average of UPA-2 and substantially below that of UPA-1. The ill-advised demonetisation has been in, no small measure, responsible for this poor performance.

The performance of the Indian economy can also be seen in Figure 4 related to the index of industrial production (IIP) which has performed especially poorly during NDA-2.

One of the main reasons for the slowdown in the Indian economy has been the lack of domestic investments as seen Figure 5. The gross fixed capital formation (GFCF) to gross domestic product (GDP) ratio has been declining since 2011–12 when it had reached its highest level of 34.3%. In 2017–18, it is as low as 26.35%, the lowest level since 2004–05.

The fall in private final consumption expenditure (PFCE) to GDP ratio has had to be compensated by a rise in government spending as seen in Figure 6 (p 40). In 2017–18, the ratio is as high as 11.88%, which is the highest level since 2003–04 (when it was 11.43%).

It was hoped that there would be a clear recognition of the challenges faced by the Indian economy and the budget would take measures to revive it.

State Government Finances

India’s public finances have shown some improvement over the last few years of the NDA-2 rule. Figure 7 (p 40) depicts the profile of major expenditures as ratios to GDP.

All expenditures, barring capital expenditures, show a welcome downward trend. However, in a more rigorous exercise we will examine this more carefully.

Government revenues appear to follow the path of the previous government even though there is some improvement during 2017–18 of the NDA-2 regime. Figure 8 shows these details.

Table 1 shows averages across governments of various public finance indicators. The only indicators where NDA-2 performs better than the previous government are revenue expenditures, subsidies and indirect taxes.

Trends in Government Finances

In the previous section, we provided a graphical examination of Indian public finances. We now carry out a trend analysis of some aspects of these finances seeking to compare the performance across the last four governments, namely NDA-1, UPA-1, UPA-2, and NDA-2. We estimate the following trend equation:

Ln X= a + b1TREND + b2TREND*UPA
    + b3TREND*NDA2 + ei


Ln X is a logged budget variable

UPA = 1 for the years 2004–05 to 2013–14

= 0 otherwise

NDA2 = 1 for the years 2014–15 to

= 0 otherwise

The TREND variable will capture the effect of the NDA-1 regime. Table 2 presents our results.

Table 2 shows the trend variable to be significant for all, barring the deficit variables. The NDA and UPA dummies are not seen to be statistically significant for any of the variables except tax revenue. Our results suggest that, except for tax revenue, the NDA-2 and the UPA regimes were no different from the NDA-1 regime. For tax revenues, however, both the UPA and the NDA-2 regimes are significantly different from the NDA-1 regime. Of the two regimes, we find that the coefficient for UPA is larger as compared to the coefficient for the NDA-2 regime. This finding is interesting as it contradicts the oft-repeated claim of the present government that tax revenues garnered by them are significantly higher than those of their predecessor.

Assessing Key Sector Allocations

We concern ourselves in this section with the sectors which were the highlights of the budget speech: agriculture, rural development, and health and education. The share of total expenditures in these key sectors is listed in Table 3.

Agriculture and rural development: The budget speech spoke of a “paradigm shift” in agriculture. The list of announcements for farmers was long and comprehensive, with the biggest announcement being the increase in minimum support price (MSP) (Budget Speech, para 13). However, these grandiose announcements were not followed up with commensurate budget allocations: allocations towards agriculture and allied activities in terms of share of total expenditure remained exactly the same in 2018–19 (BE) as in 2017–18 (BE). The allocations to rural development were even more disappointing (Table 3). A comparison of 2017–18 (BE) with 2017–18 (RE) reveals the following:

(i) For Department of Agriculture there was higher allocations for crop insurance scheme by about ₹ 1,600 crore, but this was offset by lower allocations of about ₹ 3,000 crore on centrally-sponsored schemes.

(ii) For rural department there was higher allocations of ₹ 7,000 crore on Mahatma Gandhi National Rural Employment Guarantee Scheme. However, lower allocations of ₹ 3,406 crore on other schemes reduced the overall net increase in allocation to only ₹ 3,594 crore.

(iii) For Department of Drinking Water and Sanitation, the allocation to Swachh Bharat Mission (which is a centrally- sponsored scheme) have been reduced from ₹ 19,248 crore (as per 2017–18 (RE)) to ₹ 17,483, a reduction of 7.3%. It must, of course, be mentioned that 2017–18 (RE) was 18.5% higher than 2017–18 (BE).

Education and health: The one aspect of budget 2018–19, which came in for a lot of praise, was that it brought social sector to the centre stage with important announcements about health and education. However, as in the case of agriculture and rural development, these have not translated into higher allocations. The share of expenditure allocated to these two sectors in the current budget is lower than in 2017–18 (BE) and 2017–18 (RE) as seen in Table 3.

A major announcement in the budget, which caught everyone’s attention was the “launch of a flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families and provide coverage up to ₹ 5 lakh per family per year (Budget Speech, para 59). This bombastic announcement was immediately followed by a dampener which stated, “Adequate funds will be provided for smooth implementation of this programme.” It is difficult to evaluate the feasibility and implementation issues of this scheme in the absence of more detail but past performance is usually a good guide for the future. The Rashtriya Swasthya Bima Yojana (RSBY), which is currently in operation, was allocated ₹ 1,000 crore in 2017–18 (BE) but the actual utilisation of these funds was as low as ₹ 470.5 crore as per 2017–18 (RE). With such poor performance of the existing scheme and cavalier disregard for details about the new scheme, the announcements were made with eyes set on the elections of 2019.

The finance minister announced an increase in the education cess from 3% to 4% and renamed it health and education cess. Also, the cess for secondary education on customs duties has been replaced by “Social Welfare Surcharge.” These increases are expected to raise an additional ₹ 30,079 crore in 2018–19 (BE) over the RE of 2017–18. However, the additional expenditure on education and health in 2018–19 (BE) over 2017–18 (RE) is seen to be only ₹ 4,511 crore, which is a mere 15% of the additional revenue raised via the education cess! Thus, the extra money garnered via the enhanced education cess is not going to provide the much needed big push to education and health.

Public and merit goods: Yet another yardstick by which we assess budget 2018–19 is the allocation towards public and merit goods. The standard Musgrave’s allocative efficiency rationale for state intervention for these goods is well known. The rationale and composition of public goods and merit goods as defined in this article are elaborated upon in
Lalvani et al (2009).

The share of total expenditure on public goods in 2018–19 (BE) is almost the same as 2017–18 (RE) but lower than 2016–17 (actuals) and 2017–18 (BE). The share of expenditure on merit goods is far lower than 2016–17 (actuals) and 2017–18 (BE and RE) (Table 4).

Major cuts over 2017–18 (BE) are seen in the case of urban development (-61%); food control and drainage (-26%); major and medium irrigation (-34%) and capital outlay on medical and public health (-22%). These reductions do not go hand in hand with the pious declarations in the budget speech about the importance of rural and urban infrastructure, and public health.


We began our analysis by examining the claims that the present government has been able to turn the economy around from the poor state in which it was in 2013–14. There have also been claims that the macroeconomic situation at present is much better than what it was and it is only a matter of time before the economy embarks on its path of sustained and stable economic growth. We have found that there are a few of areas where there has indeed been some improvement, notably, in the moderation of inflation, reductions in subsidies and overall deficits, and in an increase in indirect taxes. However, in other critically important areas—especially in the sluggish growth of total output, capital formation and exports—the state of the economy remains fragile and, in some cases, the situation is worse than when this present government took office. It was expected that the budget would take measures to address these fragilities in the economy but these expectations were belied.

Budgets presented before an election tend to be very political and often involve fiscal profligacy. To be fair to this government, it has not been profligate: both gross fiscal deficits and revenue deficits have remained modest. However, as pointed out by Karnik and Lalvani (2013), while fiscal consolidation is important, it is equally important to examine the quality of the deficit. The present government has continued the unhealthy practice of using capital liabilities to fund revenue deficits. Of capital liabilities in 2017–18 (RE), 54% have been employed to fund revenue deficits; this percentage is budgeted to decrease to 51% in 2018–19.

Equally political in nature have been the plethora of announcements which have generated a lot of buzz but have been bereft of details or funds. Some of these are (i) doubling farmer incomes by 2022; (ii) housing for all by 2022 (it may be noted that the allocations to the Pradhan Mantri Awas Yojana have been reduced by 5% in 2018–19 as compared to 2017–18 (RE); and (iii) the National Health Protection Scheme.

Bearing in mind the grave problems that the country faces, budget 2018–19 does not inspire any confidence that the government is serious about solving these problems. The budget seems more focused on announcements rather than serious budgetary allocations.


1 The estimated regression (with p-values) is given below:

Log(rate of inflation) =

-1.68+0.97 log(crude oil prices)–0.05 time_trend

(0.01) (0.00) (0.01)

Neither the Durbin-Watson test nor the Breusch-Godfrey LM test indicates presence of serial correlation.


Government of India (2018): Economic Survey 2017–18, Ministry of Finance, Government of India.

Karnik, A and M Lalvani (2013): “The Problem of Incompatible Objectives in Budget 2013–14: Growth, Welfare and Fiscal Discipline,” Economic & Political Weekly, Vol 48, No 13.

Lalvani, M, K Hajra and B Pazhayathodi (2009): “Introducing Expenditure Quality in Intergovernmental Transfers: A Triple-E Framework,” DRG Study No 30, DEAP-RBI, Reserve Bank
of India.

Sandefur, J and D Wadhwa (2018): “A Change in World Bank Methodology (Not Reform) Explains India’s Rise in Doing Business Rankings,” Centre for Global Development, viewed on 25 February 2018,

World Bank (2018): “Distance to Frontier and Ease of Doing Business Ranking,”, accessed on 16 February 2018.

The authors would like to thank Manali Phatak for excellent research assistance.

Updated On : 7th Mar, 2018


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