Union Budget 2022: alarming, is the cost of interest eating more?

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The general public is largely removed from the nitty-gritty of the annual budget. But the budget is something further, a barometer of the country’s economy

Gopal Goswami, California Mukesh Kabra

Smt. Nirmala Sitharaman, Finance Minister of India, recently introduced the fourth consecutive union budget and the ninth budget of the Narendra Modi Government. Nirmala Sitharaman has made it to the elite list of ministers who could submit four or more budgets, such as Morarji Desai, Pranab Mukherjee, Manmohan Singh, Arun Jayley etc. So far, Morarji Desai has a history of presenting ten budgets in Parliament.

For a commoner, the budget is a mere news item in which he is interested in knowing the tax burdens borne by the government, but in India, the number of such people is minimal. Only a small percentage of our population pay direct taxes. The other interest for people is the capital expenditure, so that they can estimate the employment generated by the capital projects and thus the flow of liquidity in the market. The general public is largely removed from the nitty-gritty of the annual budget. But the budget is something further, a barometer of the country’s economy.

The most alarming aspect of this budget is the exponential increase in interest expense. When the Modi government took over the country in 2014, the estimated interest expense in the budget was around Rs 3.80 crore, while the estimated interest expense for the 2022-23 fiscal year is Rs 9.40 crores of rupees. It implies that interest expenses have almost tripled in the span of nine years. The amount of interest, prima facie, appears to be phenomenal in terms of value, but is that a reality? We often hear from economic and political pundits that this government has ruined the economy and we are headed for financial bankruptcy. It is a general understanding that one must keep the interest burden low in order to candle through troubled waters, but is this belief really tenable in every situation?

It is a comparison rule of thumb that an apple should be compared to only one apple. An apple cannot be compared to a banana. Is our interest expense actually increasing? The answers can be traced by analyzing some vital figures between these two times.

Now compare some other vital facts regarding our economy:

Domestic debt comprises loans obtained on the open market, compensation, bonds, etc. India’s external debt includes loans through Treasury bonds, including those issued to state governments, commercial banks and other investors, as well as non-marketable and interest-free bonds. -securities in rupees issued by international financial institutions. While India’s external debt is the total debt that the country owes to foreign creditors. Debtors can be the union government, state governments, corporations or citizens of India. Debts include money owed to private banks, governments of other countries, or international financial institutions such as the International Monetary Fund (IMF) and the World Bank.

India is also lagging behind its peer countries when comparing interest to income. According to the World Bank report, which is based on 2019 values, the average interest expense to income for most World Bank countries is 5.6%. Some countries have nominal interest charges, such as Singapore and Switzerland. Most developed and developing countries can control their interest expense and keep it within tolerance. Like Germany had 1.5%, Russia had 2.6%, China had 2.8%, Canada had 5.9%, the UK had 6%, Italy had 8.2% , USA % at 2018 value.

From the data mentioned above, it is evident that the interest payment decreased considering the exponential increase in the size of the budget. The real concern is that almost half of the tax collection is spent on interest payments despite the substantial increase in tax collection in these nine years. Interest payments are also increasing compared to GDP, which is another area of ​​concern for the government.

Another important part of the budget is allocated to fixed expenses, which include salaries, pensions, wages, establishment expenses, etc., although the government tries to control these expenses through various measures. The most significant part of the comparison of these two eras is the significant drop in subsidies. The subsidies were around 2.50 lakh crore in 2013-14, which has now been pegged at around 3.20 lakh crore. A significant portion of around 22.5% of total spending was spent on subsidies in the pre-Modi era, which is down significantly from around 8.2% of total budget spending. This was made possible by the strong determination of the government and was much needed for the Indian economy. FM has made a brave decision to divest Air India, but there are still many PSUs consuming tax money, which the government will divest. It is important to spend as much money as possible on capital projects. Government departments like the railways and the post office should be more efficient and profitable. The government needs to find more ways to reduce the interest burden, otherwise we may soon be heading for an economic slowdown and financial crisis like the US has seen in the first decade of this century.

(The authors: Gopal Goswami is an academic researcher, NIT Surat and Mukesh Kabra is a Surat-based Chartered Accountant who has been practicing for 20 years. The opinions expressed are personal and do not reflect the official position or policy of Financial Express Online).

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