How One Rupee Explains India’s Budget

Budgets are usually discussed in trillions of rupees.

But the most intuitive way to understand public finance is far simpler:

What does one rupee of government income actually consist of?

And where does that rupee finally go?

Comparing the composition of a single rupee in FY 2020-21 and FY 2024-25 reveals how India’s fiscal structure has evolved, and why some recent policy choices make sense in that context.

Part 1: Where One Rupee Comes From - A Shift Within Tax Revenues

Taxes continue to form the largest part of India’s income. But not all taxes are moving in the same direction.

1. Income Tax (Other than Corporates) is Carrying a Larger Share

A key trend over the last five years is the rising share of income tax collections other than corporation tax.

In practical terms, this means:

• Individuals and non-corporate taxpayers are contributing a larger portion of the tax rupee

• Growth in personal incomes and formal employment has translated into higher direct tax dependence

This distinction matters. Income tax from individuals behaves very differently from corporation tax, it is:

• More stable across cycles

• Less sensitive to profit volatility

• Broader-based in a growing formal economy

The data suggests that India’s revenue structure is tilting more toward personal incomes than corporate profits.

2. Corporation Tax Has Lost Relative Share

In contrast, the share of corporation tax in one rupee of income has marginally declined over the same period.

This is consistent with:

• Corporate tax rate reductions in recent years

• Policy choices aimed at improving investment competitiveness

• Profit cycles normalising after pandemic disruptions

Corporation tax has not collapsed, but it is no longer the primary incremental driver of tax growth. This divergence between individual income tax and corporate tax is an important backdrop to recent Budget decisions.

3. Why Budget 2025’s Personal Tax Relief Makes Sense in This Context

Seen against this backdrop, the significant personal income tax relief announced in Budget 2025, including zero tax liability up to ₹12 lakh of income, reflects a deliberate recalibration.

Rather than signalling fiscal generosity, it suggests:

• Recognition that individuals have been carrying a rising share of the tax burden

• An attempt to support household consumption and savings

• A rebalancing between growth, compliance, and disposable income

In other words, the relief aligns with who has been paying more, not just with political optics.

4. Borrowings Remain a Structural Pillar of Income

Beyond taxes, a larger share of one rupee continues to come from borrowings and other liabilities.

This reflects sustained capital expenditure commitments and willingness to fund long-term assets through debt. Borrowing is no longer an emergency measure, it is a structural funding choice.

Part 2: Where One Rupee Goes - The Weight of Commitments

On the expenditure side, the rupee reveals why fiscal flexibility is limited.

1. Interest Payments Are the Hidden Cost of Growth

A significant portion of every rupee goes toward interest payments. Crucially, interest is directly linked to past borrowing. Higher borrowing today compounds future interest obligations.

This creates a loop:

More borrowing → higher interest → less room for discretionary spending

When interest payments take up a meaningful share of expenditure, the government’s ability to redeploy resources becomes structurally constrained.

2. Transfers to States Are a Fixed Obligation

States’ share of taxes and Finance Commission transfers together consume a large portion of the rupee.

These are constitutionally mandated and non-negotiable in the short term. This reinforces the reality that much of Union Government spending is pre-committed before policy priorities are even discussed.

3. Running the Government: The Cost of Administration and Law & Order

Once interest and transfers are accounted for, the next major call on the rupee is the machinery of the state itself.

This includes spending on:

• General administration and governance

• Police and internal security

• Justice delivery and regulatory institutions

These expenses rarely dominate headlines, but they are essential:

• Without administration, schemes cannot be implemented

• Without policing and internal security, economic activity cannot function

• Without regulatory institutions, markets lose credibility

The key point is not the size of this spending, but its inelastic nature.

These costs do not shrink easily, they form the fixed operating cost of the state.

4. Social Justice and Welfare: Commitments That Endure

Spending on social justice-related heads, including pensions and welfare-linked transfers, occupies another stable share of the rupee.

These expenditures reflect:

• Demographic realities

• Long-term social commitments

• Legal and moral obligations of the state

While the composition within this category may change, the underlying commitment does not disappear. This explains why pension and welfare spending tends to grow steadily rather than fluctuate sharply.

5. Schemes, Defence, and Development Compete for the Remainder

Only after meeting:

• Interest obligations

• State transfers

• Administrative and security costs

• Social commitments

Does the remaining rupee get allocated across:

• Central sector schemes

• Centrally sponsored schemes

• Defence expenditure

• Subsidies and targeted interventions

This is where policy choices are most visible, but also most constrained.

The popular perception that governments can freely reallocate large portions of spending often ignores how narrow the truly discretionary slice of the rupee actually is.

What This Changes in How We Read the Budget.

Seen through this lens, three realities become clear:

• A large part of government spending is structural, not political

• Running the state absorbs a meaningful share before development begins

• Every new priority must compete within a limited discretionary space

This is why budgets often feel ambitious in intent but conservative in allocation.

The rupee does not lack ambition, it simply has priorities it cannot escape.

* Disclaimer *

This article represents the author’s personal analysis and interpretation of publicly available budget 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 of the Government of India (FY 2020-21 to FY 2024-25)

Budget documents as presented to Parliament

Aggregations and CAGR calculations performed by the author for analytical purposes