by Shanmuganathan N

Indian Budgets – Missing the Forest For the Trees by Shanmuganathan N Indian Budgets – Missing the Forest For the Trees by Shanmuganathan N by Shanmuganathan N February 4, 2025 Economic Reforms, Indian Economy, Indian Liberals I have consciously avoided commenting on Indian budgets despite writing extensively on various macroeconomic issues over the years. For a nation whose economic advisors have been steeped in the Keynesian witchcraft, it would have been easy to dismiss my arguments in favour of individual liberty, limited government and sound money as preposterous, or worse, anti-poor or anti-growth. What has changed now? Today, we have a Javier Milei (current Argentina President democratically elected 1 year back) demonstrating real time that ONLY Libertarianism works. I no longer have to go back to the days of the Classical Gold Standard or Patrick Henry to justify my arguments. So here it is..  On the budget passed – I can discuss income tax exemptions, the supposed ease of doing business, FDI hikes etc. Countless experts have opined but all of those discussions miss the “Forest For The Trees.”   The criticism in this article is valid for all Indian budgets without exception. In fact, there is hardly any difference whatsoever between the UPA and NDA budgets. Incidentally, Congress could have presented the same budget as Ms.Sitharaman did, and the BJP would have dismissed it as anti-growth and Inflationary (…or whatever). If I were to summarize the issue in one phrase that plagues the Indian Economic policy making since Independence, it is “Interventionism” – from a fiscal, monetary, and regulatory perspective. Starting from 1947 would be difficult for this article. However, we supposedly have adopted a reformist path since 1991 and so will start there. How has China leapfrogged India when we were both at the same level in 1991? Should we not even question the basic premise of Indian budgets and the philosophical leanings of our economic advisors? How is it that the Yuan has appreciated over the last three decades vis-à-vis the US Dollar while the Rupee has virtually plummeted with no end in sight? China has a trillion-dollar Annual trade surplus while we run trade deficits—so much for the arguments that a cheaper currency helps in promoting exports. As a country, we have buried our heads in the sands of “The General Theory of Employment, Interest, and Money.” When we should have followed Mises and Rothbard, we have chosen to borrow from Keynes and Karl Marx. In fact, from an economic policy perspective, we are closer to Marx than Keynes today. There is nothing remotely close in our budgets to describe the BJP as a “Right of Center” or “Far Right” party. Economically speaking, it’s even to the left of what the Congress was between 2005 and 2014. Right of Center used to mean something – balanced budgets, reducing regulations, minimum government etc. Today it is a political slogan. But this was the case even with Ronald Reagan so I don’t find any point in picking on current day conservatives. For the record, even Keynes never advocated running deficits during periods of growth. But this is like leaving a bottle of booze unchaperoned in a school and telling kids to drink only in an emergency. No prizes for guessing what would have happened next. Governments around the world, lead by the US, have spent like there is no tomorrow. Fiscal Deficits – The Cancer of Our Economy Firstly, we need to understand the gargantuan size of our deficits. Reporting the deficits as a % of the GDP, notwithstanding the international consensus on this, is a very disingenuous move on the part of Governments. It hides the extent to which the Governments are living beyond their means. Let’s take our FY2025 numbers: Government revenues were Rs.31 Lakh Crore, expenditures were Rs.48 Lakh Crore, and the interest component was Rs.11 Lakh Crore. I am using whole numbers because decimals are truly rounding off errors in the scheme of things. The fiscal deficit was 4.8% of the GDP as reported. I can pick several holes in the accounting principles used to report a lower deficit than is really the case, but I am skipping all of it and jumping ahead. Here is the big picture – The Total Amount available to Government after paying interest on current borrowings was Rs.20 Lakh Crore and they spent Rs.37 Lakh Crore. The Indian Government has overspent to the tune of 85% as compared to what was available to them. So, how does the Government fund the balance of Rs.17 Lakh Crore? That comes through the “Inflation Tax” (though it’s euphemistically referred to as borrowings from the Central Bank). I am simplifying here, but this is not far from the truth. At the end of the day, in essence, what doesn’t get funded directly through taxation gets indirectly funded through inflation. So the cost of Government to the citizens is not what it taxes but what it spends. The above 85% is not an exception. This would be the ballpark from 1991, perhaps even 1947. So what are the consequences of this Interventionism on the Fiscal front by the Government? There is one hallmark of Interventionism that is just plainly obvious to somebody who understands Laissez-Faire economics, but in reality, almost everybody seems to be oblivious to the fact. That Interventionism begets more Interventionism and this begets even more Interventionism becoming an infinite loop. So here are the follow-on effects. Not an exhaustive one by any standards. The deficit is met by the RBI monetization and this is “the monetary Inflation (MI)”. One of the consequences of MI is Price Inflation and this results in high interest rates. RBI then “intervenes” to lower the interest rates below what would be the “Natural Rate of interest”. This artificially low interest rate leads to the business cycle (refer “Austrian Business Cycle Theory”) or what is more commonly known as the boom-bust cycle. This leads to artificially high asset prices eventually resulting in the bursting of