Racy Cases -25 B-day Blues

V Pattabhi Ram and A V Vedpuriswar

Date: 28th February 2005.  Time: 0930 hours.

India’s head of finance, the Harvard educated P Chidambaram, is to present the national budget in another three hours time.   All of India awaits it with bated breath.  After all, wasn’t he the man who had delivered the dream budget of 1997?  And shouldn’t he be the one to chalk the course for the next decade?

The class of 120 had assembled for a special session on Budget lingo.  “This national obsession about budgeting is ridiculous,” said Service Sam, the legendary professor of Economics.  The name had stuck ever since the day, some ten years ago, when Swaminathan Iyer had handled his first class on Service Marketing. “Why do you say so, Sam?” asked Debbie, the lollypop faced class topper.  The professor had insisted that he should be called by his name, reminiscing that this was how Rusi Modi, once the powerful head of Tata Steel, had wanted to be called by his workers.  After all, b-school grads were notches higher than workers, Sam had famously remarked.

“Because, we must have a long term perspective,” said the professor.  Flowers murmured.  “Can we have some dope on these budget terms?” For Sam, this was familiar territory.  “A budget lays down the major sources of revenue for the government, the major expenditure heads and how the gap between the total revenue and total expenditure would be bridged”.  Phew.

As the class gulped it, Sam scribbled a few numbers on the board.  “Useful budget stat”, someone remarked.  The professor eyed the class sharply.  He didn’t appreciate wisecracks.  “Revenue items are those whose impact is immediate. A good example of revenue receipt is tax levied by the government.  Other examples include interest and dividend on investments made by the government.”

As Sam sipped into a glass of orange juice, Debbie, jutted in. “Revenue expenditure is expenditure that does not result in creation of assets”.  She had majored in Accounting and hence spoke the language of the accountant.  “Examples please”, said Sam.  He hated generalizations. “Revenue expenditure is expenditure for the normal running of government departments, interest payments on government borrowings, subsidies etc”, responded Debbie.  The professor shook his head appreciatively.  And then corrected her mildly. “All grants given to state governments are also treated as revenue expenditure even though some of the grants may be for creation of assets”.  Flowers remarked, “Salaries” would be a revenue expenditure.  Debbie sighed.  Any rookie student of book keeping would know that she sneered!

“Is capital expenditure the same thing that we leant in Income tax” asked Flowers.  The girl in the middle row (GITMR) wondered aloud,  “Would they include acquisition of assets like land, buildings, machinery and loans granted by the union government as capital expenditure?” Sam was happy at the way the queries were flowing in.  “Yup” he said and then asked, “What would be capital receipts?”  The resident quizzer, responded.  “Would it be market loans raised by the government, borrowing from RBI through sale of treasury bills, loans from foreign bodies and recovery of past loans”.  Screamed a backbencher, “Yes, that would be”, much to Sam’s visible annoyance.  “An example of capital receipt is an IMF loan and that of capital expenditure is investment in infrastructure” closed out the backbencher.

“Sam, what are these deficits?” asked a voice.  The professor rose to his full height to explain.  “Revenue deficit is the difference between revenue expenditure and revenue receipts. Capital deficit is the difference between capital expenditure and capital receipts”. Debbie thought, this man seems to believe that economics is arithmetic.  Sam continued, “Budget deficit is the difference between total revenue and total expenditure”.  Flowers moved in.  “The fiscal deficit would be the revenue receipts and non debt capital receipts less total expenditure”. Goggles (because outside the classroom he was always seen in goggles) was feeling edgy.  He made bold to say, “Sam, all this mumbo jumbo is going over my head.  Could you explain with some numbers?”

The professor zipped in some figures on the board. “Suppose you earn Rs 10 lakhs a year by way of salaries and dividend income.  This is your Revenue receipt. You would be spending money on food and clothing, your daily sustenance. This is your revenue expenditure.  If revenue expenditure exceeds revenue receipt you have a revenue deficit.  You might have given loans to your friends in the past.  These may come back in the current year.  These are capital receipts.  If you borrow money that too is capital receipt (a k a debt receipt).  You may spend money to earn future revenue receipt. Like education and investments. These are capital expenditure.  To the revenue deficit add the non-debt capital receipts and deduct the capital expenditure and you have the fiscal deficit” closed out Sam.  Goggles smiled.

“Why are we making such a fuss over the fiscal deficit” he asked. “Because a large deficit may force the government to either borrow heavily or print money.  If it borrows, interest rates may harden and entrepreneurs may cancel their investment plans. If it prints money and if production does not increase immediately, more money will chase the same amount of goods, leading to inflation.”  It was Debbie.  And the class clapped.  Even Sam was impressed.  “Yes too much of deficit isn’t good.  Actually, while the government’s deficit target is 6.5% of GDP, the current deficit of the states and the center put together is 10%”.

Flowers asked, “Isn’t the burgeoning deficit hurting growth?”  GITMR said, “I think so”. And added, “Every government wants to invest in roads, water supply, power, primary education and health to accelerate growth. But it doesn’t have the money”. Said, Boka “The challenge before the finance minister, as he gets ready to present Budget 2005 budget, is in finding ways of increasing desirable expenditure while reducing the overall expenditure at the same time”.  Sam asked, “How will the FM address the challenge?”

Debbie got into the act. “Sam, I don’t like this quarrel over fiscal deficit.  The size of the deficit doesn’t matter. What matters is what is it that the deficit is incurred for. If it is being incurred for current consumption that is bad. If it finances capital investment, then it is desirable.”  Sam was impressed.  “True,” he told the class.  “In India, the deficit is funding consumption, not investments”.  GITMR supplied the statistics.  “Interest payments constitute 35% of revenue expenditure and 48% of the net revenue receipts. Pensions, (which do not increase production capacity) have grown at 21% per annum during the 1990s. In the army, pension expenditure now exceeds the pay and allowances of serving officers! Government salaries continue to be a veritable white elephant.  Subsidies are a source of major concern.  By last count they absorbed 16% of the net revenue of the Centre and constituted 11% of the total revenue expendi­ture. And then there is the loss making PSU”.

The class realized that the FM had a fight on hand. Sam closed out, “We must double the expenditure on education, quadruplicate the spending on health care and invest heavily into infrastructure. Alas these are options that don’t win votes”  He invited the class to read Gurcharan Das’s book, “Indian Unbound,” which amongst other things spoke of the politicians Catch 22 situation when it came to dating reforms.






































































Budget at a glance

Rs. Thousand Crores

    2003-04 2004-05


Revenue receipts   263 309
Capital receipts   211 168
Total receipts   474 478
Non plan expenditure   353 332
Plan expenditure   122 145
Total expenditure   474 478
Revenue deficit   100 76
Fiscal deficit   132 137











About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s