The Great Indian Rope Trick - I

Imagine an organization that does not produce a Profit & Loss Account and a Balance Sheet. It adopts a single entry system of bookkeeping. It only publishes what cash came in and what went out. The accounts are not audited (at least for a year, maybe more). It makes a whopping loss year after year. There’s lots of waste. There are plenty of “off balance sheet” items hidden away. You’d think the company would be on its last legs, if not dead. Wrong. This is the government of India.

On Monday, next week, we will see the annual ritual of the Indian budget being presented. It goes something like this – the finance minister reads a speech in the parliament, a zillion corporate honchos hang on to every word, reams and reams of stuff is posted on to the government website, and lots of underlings pore over the fine print. Self appointed experts then “analyse” the budget, TV channels run non stop coverage, next days papers are full of minutae and analysis and what it means to you and me, the ruling party says this is the second coming of Christ and the opposition says this is the first coming of Satan. Over the next few days, “experts” fall over themselves to give speeches on the budget, the opposition stalls the parliamentary debate on the budget and shout themselves hoarse until 30 seconds before the deadline for passing the budget. The Speaker applies the guillotine and takes the budget as approved. End of story until the next year around.

Most of the attention is focused on taxes – what goes up, what comes down and how it affects you and me. I am writing this piece, before the budget to focus the Indian reader’s attention on the expenditure side of the budget.

I’ve tried to construct a simplistic P&L account of the 2008 budget (the balance sheet is impossible to construct as the government does not publish its assets !). Here’s my attempt in % terms - stripping out capital items and showing only revenue items, as per Definitely Not Acceptable Accounting Practices.

Revenues - 100%

Interest on Public Debt - 32%
Subsidies (Food and Fertiliser) - 12%
Defence - 10%
Grants to States - 7%
Pensions - 4%
“Plan Expenditure” - 35% (Objective is development, but is riddled with waste)
Others 10%

Loss 10%

Capital Expenditure is 15% of revenue and the loss + capex has to be funded from borrowings every year. So borrowings added each year is 25% of revenue. And this has been going on for decades.

Let me submit some thoughts for your consideration. If this was run as a company and I was the leader, this is what I would do.

• The killer is interest on debt. And we keep borrowing a whopping amount each year. This is insanity. No more debt ; by law we must be required to balance the budget. And keep paying down debt as much as we can and get rid of it within a finite period.


• Kill subsidies, please…. How can we spend 6% of our revenues on fertilizer subsidy ??


• Put a massive cost reduction programme on “plan expenditure” and “others”. Minimum 10% savings each year without impacting effectiveness. Easy; just the leakages would be many times this target.


• Sell assets and raise money (read public sector disinvestment)


• This is of course only the central P&L. In a federal structure such as India, states run their own P&L and the story is worse there. If you add all of them, the P&L will be too horrific to even contemplate. Why not completely remove the power to issue debt from the states and tell them to spend only what they can earn . Hopefully then free colour TVs, free power to farmers and such nonsense will stop.


• Cut, cut, cut costs….. Publish a cost effectiveness plan. No Pay Commission salary hikes without cost reductions. …..And keep on cutting costs. And increase revenue. Make a profit.

Of course this is simplistic and naive. Actually, Indian finance officials are some of the best in the world. They know the exact situation and what needs to be done. But they can’t. Politically none of this is possible to implement, for after all India is a democracy. Just for the record, China runs a surplus budget. Items number 1 and 2 on our expenditure line does not feature there in any significant amount.

I’ll follow this post with one on the revenue side tomorrow.

But Indians, when you read the budget on Monday, spend a little time looking at the expenditure side of the budget.