It’s the economy, stupid: Reviewing the interim budget

February 10, 2024

We love India Data Hub’s weekly newsletter, ‘This Week in Data’, which neatly wraps up all major macroeconomic data stories for the week. We love it so much, in fact, that we’ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don’t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to India Data Hub. All mistakes, of course, are our own.


Last week, the government released an “interim budget” – a short budget for the months before the new Lok Sabha assumes power. People look happy with how the budget: (a) increased capital expenditure, while (b) lowering fiscal deficit further.

Spare me the jargon, please.

Let’s slow down for a moment. Here’s what this means:

  • Capital expenditure (or if you like sounding fancy, capex) is the money one spends, at one go, on things that will be around for a while. You get something new for the money you spend on capex – highways, airports, buildings – something you’ll use for years. Think of how different it feels to spend thirty thousand on rent, compared to buying a TV for the same amount. You’re paying rent to simply maintain life as it is. You’ll pay it again next month, and the month after that. The TV, however, is a new addition to your life: with it, you’ll live in more luxury than you did before. This is why people like higher levels of capital expenditure. That money buys one a better life in the future.
  • Our government usually spends more money than it earns, filling the gap by borrowing money. This gap between its expenditure and income is its fiscal deficit.

Sure. So what’s happening?

Two things:

  • One, the government expects that its capex (at least if you include the money it’s sending over to states for their capex) will be 18% higher than it was last year. More than 30% of its expenses, this year, will be for capex.
  • Two, it hopes to bring its fiscal deficit down to 5.1% of India’s gross domestic product, falling from 5.8% last year. This is the lowest it has been since the COVID-19 pandemic hit.

In essence, this year, the government expects to spend more in its long-term future, even while it borrows less money than before. 

Take a look at these graphs for the full picture.

That’s brilliant! Do we pull out the fireworks?

Hold on there. Remember, this is an interim budget. Take whatever it says with a grain of salt. 

  • One, it won’t be fair to the new Lok Sabha to be elected later this year if the outgoing one announces major new expenses or schemes. After all, they will actually run the country for most of the year. So, as a matter of protocol, the current government has refrained from big announcements – at least that’s how it looks from what Finance Minister Nirmala Sitharaman has been telling the media. If new schemes or policies do come in later, all these figures could go for a toss. For a better sense of things, wait for the full budget that will come after the elections.
  • Two, the elections themselves might push the government to change its course. Of course, if there’s a change in the party in power, you could see a complete reversal in policy. But even if the ruling NDA carries on, these elections will signal how voters think of its current approach. If it ends up losing votes because people didn’t think it was spending enough, for instance, it may decide to do things differently. And if it finds itself leaning on other parties to form the government, they’ll get a say in the budget as well. 

Trust the interim budget numbers as much as you’d trust a TV meteorologist speculating on next week’s weather.

Oh. So you’re saying there’s no point in reading further?

No, no! Wait! 

See, while the budget’s future projections mean very little, the revised estimates for Fiscal 2024 throw up some surprises. 

Revised what now? 

The budget doesn’t only look at the next year. It also looks backwards. A lot can change between the opening of a fiscal year and mid-way through when the government’s expectations collide with reality. So, alongside the budget, the government puts out a set of ‘revised estimates’, updating its expectations for the ongoing year.

Cool. Now surprise me.

Here’s the big one: the government thinks this year’s tax revenues will be a little poorer than it hoped at the beginning of this year. Here’s why:

  • The government doesn’t think it’ll be pulling in a lot of tax this quarter. Collections actually grew at a healthy 14.4% between April and December, compared to the same period last year. This quarter, though, will see growth drop to 8%.
  • On top of this, the central government will be sending over a lot more tax money to states than it budgeted for. 

These charts should clear things up.

What!? Are we poor now?

Nah, not really. On the whole, the government’s doing OK.

  • See, the government doesn’t just earn from taxes. It has ‘non-tax revenues’: everything from the profits of sarkaari companies, to the fees it charges for its services, to rent it receives when a company uses its land or buildings. This year, these have well exceeded our expectations.
  • This is true even though the government was unable to sell shares of sarkaari companies at the rate it hoped. (To be fair, these ‘disinvestment’ targets were only met six times in the last three decades).

In all, the government earned a tiny bit more money than it expected – for the third straight year.

So, all that build-up for nothing? Things were just as we expected? 

Well… yes and no? 

Top-line: the government isn’t really in dire straits, this year. It can spend what it planned to, without blowing up its fiscal deficit or anything. And that’s pretty much what has happened, as this chart will tell you: 

The revised estimate for this year’s expenditure is 99.7% of what was budgeted – the total difference between the two coming to ₹ 12,600 crore. Sure, that seems like a lot, but compared to every single rupee the Indian government spends, it’s a mere rounding error. It certainly doesn’t look like the government is tightening its belts.

The funny thing, though, is that this money has been spent on very different things from what we first planned. 

Small digression: the government has a surprising amount of control over how much expenditure it shows in a year, because it follows the ‘cash system’ of accounting. 

I swear I’ll shut this window if you throw more jargon at me.

Sorry, sorry. I’ll explain. 

Let’s say we strike a deal – I’ll buy a carton of mangoes from you for a thousand bucks. You send a carton over to me promptly. But I dither and sit on your bills for months, only paying you in July after you threaten to smash my head in while I’m asleep. 

When I eventually sit with my books, there are two ways I can account for the expense. I can pencil in the fact that I have to pay you as soon as you send the mangoes my way: this would be accrual basis accounting. Or, I can only note the expense once the money leaves my account: this would be cash basis accounting. This small choice alters the time at which I officially spend money. On an accrual basis, the expense would show up in my books this financial year. On a cash basis, it would only come up in June, in the next financial year. 

Mm-hmm. Go on.

Because the government only recognises expenses when money actually leaves its coffers, it can rack up expenses this year without them appearing in this year’s revised estimates, if it delays some payments a little. If it wants its initial estimates to look accurate, that’s very much an option. And when final estimates diverge greatly from the initial ones, that too is a choice.

Right. Back to the point: how have expenses changed?

The government has increased its revenue expenditure by ₹ 38,000 crore over what was budgeted. 

Really? More jarg-

Hey, I’m getting to it!

‘Revenue expenditure’ is the day-to-day expenditure the government makes to simply keep things running as usual. It’s the kind of money that goes into salaries, maintaining buildings, paying interest on loans, or running government programs. 

Ok. So what’s happening? 

Some short-term spending has come down this year. Many more have been pumped up. Here’s the break-down:

Five types of expenses have jumped up this year:

  • Subsidies
  • Defence (the day-to-day stuff, not for new equipment)
  • Education
  • The rural employment guarantee
  • The Agricultural Infrastructure Fund

Taken together, we’ve spent an incredible ₹ 1.3 lakh crores more than we initially thought we would on just these five things. 

  • On the other hand, the central government has given away a lot less money to states. Here’s the thing: states have many jobs they must perform, and they don’t always have the money for it. The central government steps in to help, giving them extra money as ‘grants’ to bridge the gap. Only, this year, these grants have gone down by a lot. Like, by ₹ 75,000 crores.

This chart should help you wrap your head around this:

But how about the nice spending you mentioned at the top, with all the new stuff? Sounded like… cabbage, I think?

Capex? Well, that’s a doozy: 

  • The revised estimates peg the central government’s capex this year at a full 5% lower than was budgeted at the beginning. Doesn’t sound like a big deal? Well, try this: the total gap between the two is ₹ 50,000 crore.
  • There’s more. That massive shortfall in grants to states above? Most of it was supposed to be for capex as well.

In all, this year has probably seen 7% less government capex than we thought we would. That’s a total drop of almost ₹ 1 lakh crore.

Even worse, states have also seen fewer loans and advances come through from the Centre this year. All this means significantly less state government capex across the country than one expected.

Huh. What should I make of this?

For one, this is a good reminder that any expenditure pattern put out in a budget is simply the government telling you what it wants to do. It hasn’t really done anything at this point. What it finally does, later, could be very different. Would you congratulate someone for simply telling you, on New Year’s Day, that they plan to eat healthy and hit the gym this entire year? No, right? Bring that skepticism to budget announcements as well. 

Even so. Why was there such a drastic shift? There are two possible answers:

  • There’s a good answer: this was the last year of the current government, after all. Maybe it simply felt pressured to rack up day-to-day expenses, and when those got too high, cut down on capex instead. That’s alright. The government can always pivot once the elections are through. 
  • And then, there’s the bad answer: Maybe we’ve saturated all the capex we can do. After all, the government’s capex has jumped by 2.5 times in just these last four years. If so, the problem is not that we didn’t have money to spend. Maybe it’s that there’s nowhere else to put money, and so, we’ve been forced to drive up recurring expenses instead. If so, capex will no longer be a thing the government can focus on in the years to come. 

Thanks for reading.

Senior writer at Zerodha

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