accounts for 70% of savings and is a major consumer of goods. It is also the most vulnerable when it comes to inflation. The argument that a certain class does not merit an incentive or benefit is really not on
A question that is now being asked is, who does the government work for? In simple terms, when we critically analyse the budget of the central government, how does one decide as to who should get what benefit? This is important because we have this unique situation where everyone is critical of what goes on in the budget. The usual target is ‘subsidy’ where we feel that the middle class benefits from LPG and the super-rich from diesel and, therefore, the concept is irrelevant. Further, the money that goes to the poor is full of leakages and hence should be better allocated. We are overly critical of the PDS and keep suggesting various ways to better the system. But, invariably, what we hear is the corporate view, which works on the assumptions that the government should work like a corporate entity and use economic judgement when making allocations. This rationale cannot be disputed if we treat the government this way. Governments, however, have to work on the basis of political and social compulsions and are good at spending and not earning because any revenue earning measure is subject to external conditions such as growth and incentives that have to be provided to all segments of society. Therefore, while we may pontificate on what is right or wrong, the government proceeds on its own to strike a balance. An interesting exercise that can be attempted is to see how the government manages the budget by giving various benefits and incentives to different sections of society. For convenience, we can assume that we have India Inc, the middle class (which also includes the rich households) and the poor. The exercise is not perfect as it is difficult to match numbers with various sections of society as there are overlaps. Further, it is accepted that the assumptions can be questioned as they may not really hold in absolute terms. But, nonetheless, we can see how these benefits flow to sections. The budget captures one important section called revenue foregone on account of all the tax concessions that are given. This is important as we normally focus on the expenditures and pass judgement. But by giving concessions on the tax front, benefits are being drawn by all. The government calls them ‘tax expenditures’. This approach has been criticised for not being accurate as it is based on certain assumptions that may not be right. This is admitted in the budget document as it assumes that certain patterns do not change when certain taxes change. Still, as we are talking of the year gone by, a large part must be true as in the past this number given is around right to the extent of 80%. The accompanying table broadly allocates various identifiable budget items under these broad headings. Some of the assumptions made here are: First, excise and customs concessions are for the corporate sector as they are the ones who demand the same. It is true that these do get reflected in some way through as lower prices for consumers, but it is difficult to allocate the same. It is only the counter intuitive statement that can be used here for devolving a part to the consumers on grounds that in case these duties were not reduced, then prices would have gone up further. Second, all income tax benefits go to the middle class. Third, food subsidy is only for the poor, though this may not be fully correct. Fourth, in the case of fuel subsidy based on Teri’s study for FY11, the subsidy has been broken up into what goes to LPG and kerosene, which are allocated to the middle class and poor respectively, while the amount for diesel has been further sub-divided for irrigation which goes to the poor, while the rest resides with the middle class. Fifth, fertiliser subsidy actually goes to the corporate sector and half has been put under that head rather than poor, though there can be an argument that if this was not there, it would have meant higher prices. The table shows that the largest benefits do flow to India Inc, which can be justified as this is the most productive sector that provides a boost to investment and growth. The private corporate sector accounts for 33% of gross capital formation and if the public sector is added, it would be 64%. Therefore, it is necessary to provide incentives here to ensure that the growth process keeps ticking.The poor do receive the second largest benefits directly through various programmes that are made available. This is a social necessity for the government and, as can be seen on the expenditure rather than the revenue side, this section does not pay taxes. The clue here is to enhance the delivery systems to ensure that these targeted segments receive the benefits and that there are few leakages. The middle class, comprising the household sector, contributes to 36% of capital formation, which is also significant. It also accounts for 70% of savings and is a major consumer of goods produced by India Inc. This segment is also the most vulnerable when it comes to inflation as it consumes all goods, unlike the poor who have access to only food items. Quite clearly this segment is also an important constituent of the economy whose needs have to be addressed.The government hence has to strike a balance across all segments, given their individual contribution to the economic development of the country. Therefore, the argument that a certain class does not merit an incentive or benefit is really not on, and fortunately, the government understands this.
A question that is now being asked is, who does the government work for? In simple terms, when we critically analyse the budget of the central government, how does one decide as to who should get what benefit? This is important because we have this unique situation where everyone is critical of what goes on in the budget. The usual target is ‘subsidy’ where we feel that the middle class benefits from LPG and the super-rich from diesel and, therefore, the concept is irrelevant. Further, the money that goes to the poor is full of leakages and hence should be better allocated. We are overly critical of the PDS and keep suggesting various ways to better the system. But, invariably, what we hear is the corporate view, which works on the assumptions that the government should work like a corporate entity and use economic judgement when making allocations. This rationale cannot be disputed if we treat the government this way. Governments, however, have to work on the basis of political and social compulsions and are good at spending and not earning because any revenue earning measure is subject to external conditions such as growth and incentives that have to be provided to all segments of society. Therefore, while we may pontificate on what is right or wrong, the government proceeds on its own to strike a balance. An interesting exercise that can be attempted is to see how the government manages the budget by giving various benefits and incentives to different sections of society. For convenience, we can assume that we have India Inc, the middle class (which also includes the rich households) and the poor. The exercise is not perfect as it is difficult to match numbers with various sections of society as there are overlaps. Further, it is accepted that the assumptions can be questioned as they may not really hold in absolute terms. But, nonetheless, we can see how these benefits flow to sections. The budget captures one important section called revenue foregone on account of all the tax concessions that are given. This is important as we normally focus on the expenditures and pass judgement. But by giving concessions on the tax front, benefits are being drawn by all. The government calls them ‘tax expenditures’. This approach has been criticised for not being accurate as it is based on certain assumptions that may not be right. This is admitted in the budget document as it assumes that certain patterns do not change when certain taxes change. Still, as we are talking of the year gone by, a large part must be true as in the past this number given is around right to the extent of 80%. The accompanying table broadly allocates various identifiable budget items under these broad headings. Some of the assumptions made here are: First, excise and customs concessions are for the corporate sector as they are the ones who demand the same. It is true that these do get reflected in some way through as lower prices for consumers, but it is difficult to allocate the same. It is only the counter intuitive statement that can be used here for devolving a part to the consumers on grounds that in case these duties were not reduced, then prices would have gone up further. Second, all income tax benefits go to the middle class. Third, food subsidy is only for the poor, though this may not be fully correct. Fourth, in the case of fuel subsidy based on Teri’s study for FY11, the subsidy has been broken up into what goes to LPG and kerosene, which are allocated to the middle class and poor respectively, while the amount for diesel has been further sub-divided for irrigation which goes to the poor, while the rest resides with the middle class. Fifth, fertiliser subsidy actually goes to the corporate sector and half has been put under that head rather than poor, though there can be an argument that if this was not there, it would have meant higher prices. The table shows that the largest benefits do flow to India Inc, which can be justified as this is the most productive sector that provides a boost to investment and growth. The private corporate sector accounts for 33% of gross capital formation and if the public sector is added, it would be 64%. Therefore, it is necessary to provide incentives here to ensure that the growth process keeps ticking.The poor do receive the second largest benefits directly through various programmes that are made available. This is a social necessity for the government and, as can be seen on the expenditure rather than the revenue side, this section does not pay taxes. The clue here is to enhance the delivery systems to ensure that these targeted segments receive the benefits and that there are few leakages. The middle class, comprising the household sector, contributes to 36% of capital formation, which is also significant. It also accounts for 70% of savings and is a major consumer of goods produced by India Inc. This segment is also the most vulnerable when it comes to inflation as it consumes all goods, unlike the poor who have access to only food items. Quite clearly this segment is also an important constituent of the economy whose needs have to be addressed.The government hence has to strike a balance across all segments, given their individual contribution to the economic development of the country. Therefore, the argument that a certain class does not merit an incentive or benefit is really not on, and fortunately, the government understands this. 
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