This is the second post in a 3-part series that explains how India's budget works. If you haven't read the first part yet , I strongly recommend giving it a quick glance before reading this post.

In the last post, we learned how the Indian government earns revenue. We also learned that India spends a lot more than what it earns, and needs to borrow large amounts of money in order to fund it's expenditure.

In this post, we will look at where India spends its money, how its expenditure patterns have changed in the last few years, and how the current government's policies influence expenditure.

Major sources of expenditure

Before we go any further, where do you think the government spends the largest proportion of its funds?







Trends in expenditure

Total expenditure as a proportion of GDP has been going down. This means that India's GDP growth has outpaced the increase in government expenditure over the past decade. Another way to put this is that Indian government expenditure compared to the size of the overall economy has been steadily decreasing. This is, perhaps, an indication of India becoming a more market driven economy with a smaller government.


Looking deeper into the budget, we see that expenditure on interest payments as a proportion of overall expenditure has decreased over the years. This is a promising trend, but more still needs to be done to resolve India's debt situation (as we will see in the next post in this series).

Expenditure on defence (as a proportion of overall expenditure) has been stable. This might increase if the recommendations of the seventh pay commission are implemented during this budget. However, expenditure on Food and Agriculture has generally increased over the years.

You can explore the trends in expenditure for different departments through the interactive below. Give it a try!

Looking closer at subsidies

A significant chunk of this government expenditure (almost 14% last year) is spent on subsidies. This amount rose significantly under UPA2 as a result of both policy and rising fuel costs.

51% of these subsidies are food subsidies, 30% are fertilizer subsidies, and 12% are fuel subsidies.

Challenges moving forward

India's high expenditure on interest payments and defence make it difficult to allocate more money for other resources, like education and infrastructure. However, given India's tensions at the border and high debt levels, it would be difficult to curb these in the short-term.

The government took major steps to solve this problem last year by opening up private-public partnerships in the Defence sector. It would be interesting to see the steps that FM Jaitley takes this year to help curb the fiscal deficit.

And that, in summary, is a simplified overview of how the government spends your money. This article will be updated after the budget is announced. The last part of this series, which highlights India's debt problem and macro-economic issues, will be up after the budget is announced as well. If you have further questions, or would like to give feedback about this post, please drop me a line at [email protected]

Part 1: How does the Indian government earn it's money?
Part 3 (coming soon) : Is there a looming debt trap? What India needs to get right very soon.