What is the shape of government finances?
The big question is, how will all of these investments be financed? The ratio of tax revenue to gross domestic product is 40% in most rich countries. In India, it’s 10%. Public expenditure is 18% to 19% of GDP, which leaves a budget deficit of nearly 10% — half by the central government, half by the states. You have a real serious public-finance problem. Q: How can the deficit be reduced? A: One way is to cut wasteful spending. Defense is a major budget item, so peace with Pakistan could help. But much of the deficit also is driven by massive subsidies to producers. The major source is services provided to factories and big farmers for which costs are never recovered. The rate that many of them pay for power is often very low, so that’s an implicit subsidy. There also are implicit subsidies in irrigation. Canals are dug and managed by the government, but few of the costs are recovered. There also is a fertilizer subsidized, plus the high procurement prices we talked about. Q: Why then
