Where the money comes from, and where it goes.

The Centre's deficit swells in hard years and shrinks in good ones. It ran at seven to eight per cent of GDP through the late 1980s, before the crisis of 1991, fell after the reforms that followed, rose again after the global financial crisis of 2008, and reached its highest in the pandemic year, when revenue fell and spending on food and health rose. The states' deficit is smaller and steadier: since the mid-2000s their own fiscal responsibility laws and the Centre's limits on their borrowing have held it near three per cent of GDP.

The deficit does not build evenly through the year. Taxes arrive in lumps (advance tax in June, September, December and March), the RBI pays the government its surplus in May, and spending bunches near March. So a deficit at a third of the budget by July is neither good nor bad in itself; compare it with the same month of earlier years, as this chart does. A line that ends above 100% means the year's deficit overshot its budget.

A budget is a plan, written in February for a year that ends fourteen months later. The gap between the grey mark and the blue one is how far events moved it: a recession that cut taxes, an oil shock that raised subsidies, a pandemic. The revised estimate, made in the last weeks of the year, is usually close to the outcome. When reading any budget, ask which of the three numbers you are looking at.

Until the 1990s the RBI financed much of the deficit by lending to the government almost on demand, through ad hoc Treasury bills that it simply printed money to buy. That ended in April 1997. Since then the deficit has been paid for mostly by selling bonds to banks, insurers and funds at market rates, and, from the 2000s, by the National Small Savings Fund, which lends the savings collected at post offices. Shares can exceed 100 when another source runs negative, for instance when the government builds up cash.

In the 1970s the Centre lived on excise duty and customs, taxes on goods made and goods imported. Liberalisation cut tariffs from the 1990s, and income and corporation tax grew with the salaried and corporate economy. In July 2017 the Goods and Services Tax replaced most excise duty, service tax and the states' sales taxes; what remains as excise is mainly on petrol, diesel and tobacco. The jump in income tax in 2000-01 is a change in sharing, not in collections: until then the states received most of the income tax and part of excise, and from that year they receive a share of all central taxes together. Shares do not add to 100, because smaller taxes and adjustments for the states' share are left out.

Gross taxes are before the states' share is paid out. Direct taxes fall on income and profits, so they grow faster than the economy when incomes rise; indirect taxes fall on what people buy, so they weigh more heavily on poorer households as a share of their income. Each break in the lines is a change in how GDP was measured, not a change in taxes.

States tax what is local: sales and the state's half of GST, liquor, stamp duty on property, vehicles, electricity. The Centre taxes income, profits and imports, and then hands roughly two-fifths of its divisible pool to the states, as the Finance Commission decides. So the states spend far more than they collect; this chart shows only who collects.

'Other day-to-day spending' is the largest block: salaries, pensions, and the grants the Centre gives states and its own schemes (rural jobs, health, education) that pay for running costs. Capital outlay builds assets the government owns. Grants that let states build roads count as day-to-day spending in the Centre's books, so the Centre's capital outlay understates what its money builds.

This is the measure of how tightly old debt binds the present. A household that spends a third of its salary on loan instalments has less left for everything else, and the same is true of a government. The Centre's ratio rose through the 1980s and 1990s as deficits piled up, to about half of its revenue around 2000, eased as the economy grew fast in the 2000s, and rose again with the pandemic borrowing. The states' ratio is lower because they borrow less and get much of their revenue as transfers from the Centre.

Capital expenditure is spending on assets (roads, railway lines, defence equipment) and loans to states and public companies. Interest is the cost of past deficits. After 2020-21 the Centre raised capital spending sharply, including long interest-free loans to states for building. Whether the extra roads and lines pay back the borrowing is a question these figures cannot answer.

Debt grows with each year's deficit, but as a share of GDP it can fall if the economy grows faster than the debt. That is how the ratio fell in the 2000s. It jumped in 2020-21, when the deficit soared and GDP shrank at once. Almost all of it is owed in rupees to lenders inside India; the Centre's external debt is a small slice, valued at today's exchange rate.

Banks must hold a share of their deposits in government bonds (the statutory liquidity ratio), insurers and provident funds buy them because they need safe, long-dated assets to match what they owe policyholders and members, and the RBI holds them as it manages money in the economy. Foreign investors hold a small share, larger since Indian bonds entered global bond indices in 2024. Your fixed deposit, insurance premium and provident fund contribution all end up, in part, here.

Treasury bills are the government's short-term borrowing, sold every week and repaid within a year. They smooth out the timing of taxes and spending. Cash management bills are even shorter, issued for days or weeks when cash runs low. Much of the 91-day stock is held by state governments, which park surplus cash in them.

Long-dated debt is safer for a government: it locks in the rate it borrows at now and need not be refinanced soon. Debt falling due within five years must be repaid or rolled over at whatever rates prevail then. India's government sells bonds of up to fifty years, bought mostly by insurers and pension funds.

Small savings schemes are run through post offices and banks: the Public Provident Fund, National Savings Certificates, Kisan Vikas Patra, the Senior Citizens' and Monthly Income schemes, time and recurring deposits, and Sukanya Samriddhi for girls. The money goes to the National Small Savings Fund, which lends it to the Centre (and to some states). Their rates are set each quarter, linked to government bond yields.

The Finance Commission, appointed every five years, decides what share of the Centre's divisible taxes goes to the states and how it is split among them; grants pay for centrally sponsored schemes and fill gaps. A state that leans heavily on transfers has less control over its own budget. In 2017 GST took away the states' power to set their own sales taxes on most goods.

Social services are schools, hospitals, water, housing and welfare; economic services are agriculture, irrigation, power, roads and industry. These are what a state government does for its people. Interest and pensions are commitments made in the past, which a state cannot easily cut.

A state's debt is best read against the size of its own economy, which is what can be taxed to repay it. Small hill and north-eastern states often show high ratios because their economies are small and their spending large; Punjab, Kerala, West Bengal and Rajasthan carry high debt from years of revenue deficits. A ratio this high does not mean a state cannot pay: the RBI manages state borrowing, and the Centre caps it. It means more of the budget goes to interest.

The RBI is every state's banker. When a state's cash runs short it first borrows against the funds it keeps with the RBI (the special drawing facility), then takes short advances up to a limit (ways and means advances), and beyond that runs an overdraft, which costs more and cannot run for more than a set number of days. Frequent overdrafts are the clearest sign that a state is struggling to pay its bills on time.

Each time the statistics office rebases GDP it re-measures the size of the economy, and every ratio to GDP moves with it, though not a rupee of the deficit has changed. For the years before 2011-12 the RBI's ratios, on the GDP series of their time, sit close to the same deficits over the back series of the 2011-12 base: those rebasings moved this ratio little. The new 2022-23 series measures a smaller economy in recent years, so the same deficit is a larger share of it. Compare deficits across years only on one ruler, and never compare a ratio on one base with a target set on another.