India vs the United States: Two Budgets, Two Economic Realities

Comparing budgets across countries is often misleading. Different nations tax differently. They spend for different reasons. And they carry very different social and institutional responsibilities.

Yet, when done carefully, a comparison can reveal how economic models shape fiscal choices. This post in The India Budget Files places India’s Union Budget alongside that of the United States, not to rank them, but to understand why they look the way they do.

Part 1: How the Rupee (and the Dollar) are Earned

A useful way to begin is by asking a simple question. Where does one unit of government income come from?

Individual Income Tax: The Backbone in Both Systems

In both India and the United States, individual income tax is the single largest contributor to government revenues. In the US, nearly half of federal revenues are sourced from individual income taxes. In India, the share has risen sharply over recent years, reflecting:

• Higher formalisation

• Rising reported incomes

• Broader tax compliance

This convergence is important. It suggests that as economies mature, direct taxation of individuals becomes the most stable revenue anchor.

Social Insurance & Retirement Receipts: A Structural Difference

A major difference appears in the next line item. In the United States, a significant portion of revenues comes from Social Security contributions and Medicare payroll taxes. These receipts are treated as part of federal revenues, even though they are earmarked for future obligations.

India views this differently. Contributions towards Provident funds, Pension schemes, Small savings and similar instruments are largely held in trust and not mixed with regular revenue streams. They appear on the balance sheet as liabilities, not income.

This accounting difference matters.It explains why India’s revenue composition looks more dependent on “other sources,” while the US shows a larger direct revenue base.

Corporate Tax: A Subtle but Important Contrast

Perhaps the most striking contrast lies in corporate taxation. Despite being home to many of the world’s largest multinational corporations, corporate taxes form a relatively small share of US federal revenues.

In India, corporate tax contributes a much higher proportion of overall receipts. This difference reflects:

• Extensive use of deductions, credits, and deferrals in the US

• Global tax planning structures common among large multinationals

• Policy choices that prioritise competitiveness over revenue extraction

India’s approach, by contrast, places greater reliance on corporate taxation, even after rate rationalisation. Neither approach is inherently right or wrong. But they represent very different trade-offs between growth incentives and fiscal dependence.

“Other” Revenues: The GST Effect

India’s “Other” revenue category appears unusually large in comparison. The reason is structural. GST is a central government revenue in India. In the US, sales taxes largely accrue to states, not the federal government.

What appears as diversification in India is, in part, centralisation of indirect taxation. This explains why headline revenue mixes can look misleading without institutional context.

Part 2: How the Rupee (and the Dollar) are Spent

If revenues reflect economic structure, expenditure reflects policy priorities.

Defence: Different Scales, Similar Priorities

In absolute terms, US defence spending is far larger than India’s. But as a percentage of overall expenditure, the gap narrows considerably. Both countries allocate a substantial share of budgets to National security, Military readiness and Strategic deterrence.

Defence pensions, interestingly, consume a similar share of total expenditure in both systems, highlighting the long-term fiscal nature of defence commitments.

In today’s geopolitical environment, defence spending is no longer discretionary. It is a baseline cost of sovereignty.

Science, Space, and Technology: The Gap is Real, but Closing

The US spends a significantly higher share of its budget on Scientific research, Space programs and Advanced technology. This reflects decades of sustained investment.

India’s allocation is smaller, but the direction is clear. Spending on science and technology is rising. The focus is shifting toward strategic and applied research. This is not catch-up spending yet, but it is positioning.

Energy and Agriculture: India’s Structural Imperatives

Energy and agriculture spending stands out in India. As a share of expenditure, India spends as much as, or more than, the US in these areas. This reflects necessity, not choice:

• A large agrarian population

• Energy transition challenges

• Food security priorities

For India, these are macroeconomic stabilisers, not sectoral subsidies. 

Education, Healthcare, and Housing: A Stark Contrast

The sharpest divergence appears in healthcare and social services.

In the US:

Healthcare spending dominates federal expenditure. Medicare and related programs form a large share of the budget. This is partly because healthcare costs are high. Employer-provided insurance and tax deductions are embedded in the system

In India:

Public healthcare spending remains modest. Much of healthcare expenditure is still out-of-pocket. Similarly, spending on education and housing as a share of the budget is lower in India, reflecting different delivery models, greater reliance on state governments and lower per-capita fiscal capacity.

This gap is not a criticism, but it is a signal of future fiscal pressure as incomes rise and expectations change.

Central Operations and Justice: Efficiency vs Capacity

India spends a higher share on central fiscal operations, but less on justice and judicial infrastructure. This highlights two challenges:

• Improving efficiency in central administration

• Scaling judicial capacity for a large and growing population

A faster, better-resourced justice system is not just a governance issue, it is an economic one.

Interest Payments: The Cost of Borrowing

Finally, interest payments bring us back to the core theme of Chapter 3. Despite higher debt-to-GDP ratios, the US devotes a smaller share of expenditure to interest costs than India. The reason lies in lower borrowing costs, reserve-currency status and deep capital markets

India, borrowing at higher real rates, faces a larger interest burden even with lower absolute debt. This reinforces a recurring theme of the series, the challenge is not debt itself, but the cost at which it is carried.

What This Comparison Really Tells Us

India and the US are not converging toward the same fiscal model. The US budget reflects a mature economy with high social spending and low borrowing costs. India’s budget reflects a growing economy balancing infrastructure, security, and development. Both are internally consistent. Both face constraints. The lesson is not to imitate, but to understand.

Budgets are mirrors of economies. They reveal who pays, who receives and what a nation prioritises when resources are finite. 

Seen in that light, India’s budget is not small or constrained, it is calibrated to where the economy is today, not where it wants to be tomorrow. That gap between the two is where policy will continue to evolve.

* Disclaimer *

This article represents the author’s personal analysis and interpretation of publicly available data. The views expressed are for informational and educational purposes only and do not constitute financial, investment, legal, or policy advice.

No responsibility or liability is accepted for any loss or damage arising from reliance on this content.

Resources & Data Reference:

Annual Financial Statements and Receipt Budget of the Government of India (FY 2020-21 to FY 2025-26), including the Assets and Liabilities Statements

USA Budget - https://www.whitehouse.gov/omb/information-resources/budget/historical-tables/

Aggregations, CAGR and percentage calculations performed by the author for analytical purposes.