How to explain the Budget to your grandma

Thankfully, the working-day was over and the presentation on the budget was done. She could now look forward to drinking multiple cups of her grandmother’s hot filter coffee. Only that could get rid of the chill in her bones.

“So, how was the presentation?" her grandmother asked, as soon as she stepped inside the house. Well, talk about someone getting straight to the point.

“It was okay," she replied.

Earlier in the day, she and her team were supposed to make a presentation on the central government’s annual budget, due on 1 February. This was a part of their final year economics course.

“Just okay?" the grandmother said.

“Actually, things didn’t go as per plan, Ajji."

 

“They never do," Ajji said. “Have I told you about how your aunt was a planned baby, but your father wasn’t?"

“Ajji," she screamed. “That’s too much detail."

“You kids these days…" the grandmother lamented. “So, tell me what happened?"

“We were all set to make the presentation and the professor changed the game at the last moment."

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“Oh!"

“He basically asked what seemed like an innocuous question."

“Which was?"

“How would you define the government budget in simple English?" she replied.

“Isn’t that a simple question?"

“Yes."

“And you did reply to it?"

“Yes, I said it is primarily a detailed statement of account of the government’s expenditures during the next financial year along with the different kinds of income it expects to earn. Further, the government spends more than it earns. The difference is referred to as the fiscal deficit. It finances the deficit by borrowing money, primarily through the sale of financial securities referred to as government bonds. The budget provides these details as well."

“This was a very detailed answer. Then why did you say it seemed like an innocuous question?" Ajji asked.

“Oh, that’s because of the next question the professor asked," she replied.

“Which was?"

“How does the government know in advance the expenditure it is going to incur during the course of any year?"

“Fabulous question," Ajji said. “So, what did you say?"

Extra expenses

First, I fumbled," she replied. “I said something like, the government doesn’t know in advance."

“It doesn’t?"

“Well, actually, it has some idea about most things, but it doesn’t know for sure about a few things."

“Hmmm."

“Take the case of salaries and pensions that are due to current government employees and the retired ones. The government has a pretty good idea of this expenditure."

“That makes sense."

“Also, usually, the government has a decent idea of the total amount of money that it will spend on paying interest during the year on the borrowings it has accumulated over the years to finance the fiscal deficit."

“Ah, you talk like a proper economist," an excited Ajji said.

“Well, I am studying to be an economist, so, I won’t talk like a doctor, na."

“Yes, yes. So, you were talking about the interest on borrowings."

“In 2021-22, the government had budgeted ₹8.1 trillion towards interest. It paid ₹8.14 trillion. In 2020-21, the government had budgeted ₹7.08 trillion, it ended up spending ₹6.8 trillion."

“You tackled the question well," said Ajji. “But you should have given an example from the current financial year 2022-23 as well."

“I did Ajji," she replied. “Only if you don’t keep interrupting me and let me speak."

“So, what was that example?" asked Ajji.

“In December, while reading the Mint newspaper, I had come across this news item. The government had presented the first batch of supplementary demand for grants of around ₹3.26 trillion."

“What does that mean?"

“It means that during 2022-23, the government plans to spend ₹3.26 trillion over and above the ₹39.45 trillion it had budgeted for when the budget was presented last February."

“Oh. And where will this extra money go?"

“One area of extra expenditure shall be fertilizer subsidy."

“What is that?" Ajji asked.

“As if you don’t know Ajji."

“I do, but still do tell me, I need to brush up on my economics. I am getting rusty, sitting at home all day, waiting to make filter coffee for you."

“The fertilizer companies sell fertilizer to farmers at a price which is lower than the market determined price or what it costs to produce or import fertilizer for that matter. The government, in turn, compensates these companies by allocating money for it under fertilizer subsidy."

“It is a little more complicated than that. But at your level, this is good enough."

“So, the government had allocated around ₹1.05 trillion towards fertilizer subsidy for 2022-23. Nonetheless, the trouble is that between April and November 2022, the government had already spent ₹1.52 trillion on fertilizer subsidy compensating the fertilizer companies."

“Yes."

“So, the government had spent more than the amount allocated towards the fertilizer subsidy for the full year, in the first eight months of the financial year. Hence, it plans to spend an extra ₹1.09 trillion more towards fertilizer subsidy than the budgeted amount," she explained, much to the pleasure of her grandmother.

Putin’s impact

But why did this calculation go wrong?" asked Ajji.

“Russia attacked Ukraine. This sent the prices of many commodities, including fertilizer, soaring. Russia is the biggest exporter of fertilizer in the world. And India is the second largest importer."

“Yes. That’s true."

“In fact, data tells us a very interesting story. During the period April to November 2022, India paid $580 per tonne on average for imported fertilizer, 55% higher than the $374 per tonne paid during the same period in 2021."

“You have really dug into the data, my dear."

“Yes, Ajji. And there’s more."

“Oh, I know, what you are going to say next."

“Really?"

“Yes. That India used to import a lot of fertilizer from Russia until 2021-22, but in 2022-23 it has been unable to do so due to Russia’s attack on Ukraine," Ajji said.

“You know common sense would suggest that but the data doesn’t."

“As in?"

“Up until 2021-22, India used to import a lot of fertilizer from China. In fact, between April and November 2021, close to one-fourth of the fertilizer imported came from China. During the same period, just under 4% of fertilizer imports came from Russia."

“Oh, I had no idea about that."

“During this financial year, the imports from China have fallen by more than 46% to around 2.5 million tonnes. Meanwhile, fertilizer imports from Russia have risen 275% to 2.89 million tonnes. In fact, from April to November, imports from China formed around 12% of overall fertilizer imports, whereas imports from Russia were at 13.6%."

“Who would have thought that there is foreign policy playing out here as well," Ajji remarked. “Did you say all this in your class?"

“No. I didn’t. The professor gets irritated if I get into too much detail," she remarked.

“But this shows how Russian president Vladimir Putin has ended up impacting the Indian budget."

“In a small way, but yes, it does. Actually, there is another impact that the global economy has had on the Indian budget."

“Really?"

The GST windfall

Yes. The total goods and services tax collection from April to December 2022 stood at ₹13.4 trillion or around 25% higher than the collection of ₹10.7 trillion during April to December 2021."

“So?"

“Under Goods and Services Tax (GST), imports are deemed to be interstate supplies. Given that, they are subject to integrated GST. Hence, GST needs to be paid on imports as well. From April to December 2022, the total integrated GST earned from imports stood at ₹3.64 trillion, around a third-higher than what was earned during the same period in 2021-22."

“And why has this happened?"

“This has happened because prices of many commodities went up during 2022-23. This led to Indian importers having to pay a higher price for these commodities. This also led to higher integrated GST collections for the government, given that the tax is a certain percentage of the price," she explained.

“So, at one level, the government gets hurt because of having to offer higher fertilizer subsidies because of higher prices. At another level, it benefits because higher prices of imported commodities have led to higher GST collections," Ajji explained.

“Weird, but true."

“I guess we have deviated a little from the topic we started with. We were talking about the supplementary demand for grants of ₹3.26 trillion."

“Yes."

“So, other than fertilizer subsidies, where else is the government planning to spend this money?" Ajji asked.

“I checked up the supplementary demand for grants and there is an allocation of ₹80,348 crore to the department of food and public distribution of the government."

“And what is this for?"

“This is primarily for food subsidies offered by the government. The government, through the Food Corporation of India (FCI), primarily buys rice and wheat directly from the farmer. This is sold through the public distribution system or ration shops throughout the country, at an extremely low price. The FCI needs to be compensated for this."

“Anything else?"

“There is an allocation of ₹22,000 crore made towards oil marketing companies for subsidies offered on domestic cooking gas," she said.

Balancing act

Now, the question is where is this extra money going to come from?" asked Ajji. “The government needs to earn it from somewhere and if it can’t, then it needs to borrow."

“When the last budget was presented in February 2022, the central government had hoped to earn ₹19.3 trillion through taxes during 2022-23. Tax collections this year have been robust. In fact, in a press release put out on 17 December, the government had said that its direct tax collections, which constitutes corporate income tax and personal income tax, stood at ₹11.4 trillion during 2022-23—around one-fifth higher than during the same period in 2021-22," the budding economist explained.

“Okay."

“Also, the government earns a lot of tax during the month of March, the last month of the financial year. In 2021-22, close to 19% of the tax that the government earned during the year came in the month of March. So, I think, this growth in tax revenue should help finance the extra expenditure of ₹3.26 trillion. Of course, the government always has the option of borrowing more, though that comes with its own set of consequences."

“Guess that explains it. The higher tax collections are likely to take care of the higher expenditure."

“Yes," she said. “But there is one thing that I can’t get my head around."

“Oh, what’s that?" asked Ajji.

“Well. The professor never got around to seeing our presentation."

“Oh that," said Ajji, with an all-knowing smile on her face.

“You know Ajji, the only time you smile like that is when you are trying to hide something from me."

“Hide?"

“Come on, tell me," she said. “Or I will tell Ma that you were relishing the gajar ka halwa at 4 a.m. today."

“Actually, your professor was my student when I used to teach economics at the university."

“And?"

“So, I asked him to give you a tough time."

“Really Ajji?" she mock-shouted. “I think Ma needs to know about your early morning gajar ka halwa eating habit."

“Well, then she also needs to know about that guy with curly hair you are hanging around with quite a lot these days. You know all those extra classes…And time spent at the Sundar Nursery in the early evenings."

(The example is hypothetical)

Vivek Kaul is the author of Bad Money.

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