Positive #1: Government Expenditure Coming Down

The Big Picture — India’s Fiscal Discipline

The professor opens by comparing India’s government expenditure as a percentage of GDP with other countries. The US spends about 30%, the UK around 25–28% (budget of ~1 trillion pounds against a 3.5–3.6 trillion GDP). India historically hovered around 13–14% but spiked to about 15% during COVID, which was understandable — in a crisis, the government has to step in because the private sector pulls back from investment.

But the concern is that India continued spending at 15% for three to four years after COVID. The professor sees this as problematic because sustained high government spending crowds out the private sector.

This Budget’s Breakthrough: Tax Cut + Expenditure Cut

“One of the biggest takeaways of this budget is there is tax cut and expenditure cut. That is very, very rare.”

The professor emphasizes that a tax cut without an expenditure cut is a fraud — it simply means either interest rates go up or inflation eats away your savings. He contrasts India’s approach with the US:

• US Democrats: Increase expenditure. They impose some taxes, but increase expenditure far more.

• US Republicans: Talk about smaller government but only cut taxes without cutting expenditure.

• Result: Everyone adds to debt, which is where the US is right now (120%+ debt-to-GDP).

• India’s budget this time: Genuinely cutting both. Very rare globally.

The Numbers

The revised estimate for 2025–26 expenditure is 49 lakh 60 thousand crore on a GDP of 354 lakh crore — that’s less than 14%. For 2026–27, projected GDP is 391 lakh crore with projected expenditure of 52.5 lakh crore. Given the government’s track record of underspending, the professor estimates actual expenditure will be about 52 lakh crore, bringing the ratio down to approximately 13%.

For context, India’s historical low for central government expenditure was around 12.5% — and they’re heading back there.

Why This Matters: The Savings Constraint

The professor connects government spending to India’s structural savings problem:

• Savings rate declining: From 36–37% in 2008 to below 30% now. Total savings are about 100–110 lakh crore.

• Government takes 30 lakh crore: State and Central governments together consume about 30 lakh crore of national savings.

• Depreciation eats 15–20 lakh crore: Maintaining existing capital assets requires significant resources — this is why developed countries struggle to grow, all their savings go toward maintenance.

• What’s left for private investment: Only about 50–60 lakh crore. And there’s no significant FDI coming.

Countries that grew at 10% (Korea, Taiwan, Singapore, China) had investment rates of around 50%. India is nowhere close. So the government withdrawing from the economy and freeing up resources for the private sector is crucial for long-term growth.

“You can’t have a Viksit Bharat by just government stimulus. That does not happen.”

Positive #2: Defense Budget Increase

The Numbers — Context Matters

Defense budget has gone up by about 20%, from 6 lakh 90 thousand crore to 7 lakh 80 thousand crore. There’s a 20–30% increase in defense capex specifically.

However, the professor cautions against celebration. In dollar terms, it’s about 86 billion dollars. The US is approaching a trillion dollars in defense spending. And this is where the professor launches into his famous PPP rant.

The PPP Rant

“PPP is nonsense for anyone who is here. PPP is good for some poor guy, average guy. Nobody is an average guy here. You are all 99.99th percentile of the Indian economy.”

The professor’s argument: PPP (Purchasing Power Parity) exchange rates are meaningless for defense because we import critical equipment. When your HR department uses PPP in salary negotiations, he says, get lost. Your actual purchasing power parity exchange rate as an ISB graduate is not even 100 — it’s 120 or 150, because most of what you consume is priced higher, not lower. He notes that while dosa prices may differ, dosa is a tiny proportion of your expenditure.

Defense as the Highest-Multiplier Government Spending

This is where the professor connects defense spending to his broader fiscal multiplier framework. He references a paper by Valerie R. (in the Journal of Economic Perspectives) surveying global evidence on fiscal multipliers:

• Most government expenditure: Multiplier of less than 1. You’re better off leaving money with the private sector.

• Defense spending (especially capex and research): Consistently shows multipliers significantly above 1, close to 2, across all countries.

• Why? Technology spillovers. Most fundamental technology comes out of defense R&D, and that has positive externalities for the entire economy.

He also references Victor Davis Hanson’s book Second World Wars on the decisive advantage technology gives in warfare, and the history of Spain’s technological superiority in conquering civilizations.

The professor adds a caveat: all the positives from the defense increase could get nullified if the Rupee keeps depreciating, since much of defense procurement requires imports.

Criticism #1: “Capital Expenditure-ism”

The Core Problem: Accounting Drives Decision-Making

“I call it capital expenditure-ism. Accounting drives decision making, not the usefulness.”

The professor’s central criticism is that India’s economic advisors have convinced the government that as long as something is classified as capital expenditure, it is good. This leads to building tangible things (airports, trains, studios) without applying basic capital budgeting rules.

The Multiplier Principle

When the government takes money from taxpayers, there’s a deadweight cost of taxation — the classic triangle from microeconomics showing total loss of social welfare from production lost due to taxation. When that money is then spent, it should at least create more value than what was lost. If it doesn’t, it’s a negative NPV investment.

The professor’s framework: If you are unconstrained, do all positive NPV projects. But the government IS constrained — it doesn’t have unlimited money. When constrained, you must rank by NPV and fund the highest ones first. This is completely missing from India’s budgetary allocation.

Specific Examples

Airports in Remote Areas

84–90 airports built in the last few years in places where there’s virtually nothing. The argument is always the same: “If I build an airport, Elon Musk will set up a factory.” The professor calls this nonsensical. He references the UDAN subsidy scheme — flights operate for 3 years with a 3,000 rupee subsidy, then shut down. He notes 14 airports have already shut down. People reroute through subsidized airports (like flying to Shimoga instead of Mangalore) purely because of the subsidy, not genuine demand.

Vande Bharat Trains

“It’s a great train. No justification for using taxpayer money for that. Absolutely no justification.”

The professor points to IRFC (Indian Railway Finance Corporation) as a case study. IRFC was set up to raise money for railways through the market. Now railways get so much direct budget funding that IRFC has money with no borrowers. The 50–60 employees are going around lending to infrastructure borrowers at rates lower than Government of India bonds (7.4%) with no idea of credit appraisal. He sarcastically suggests: if you need to borrow, just go to IRFC — they’re looking for borrowers.

Cuts to State Grants

The professor’s specific complaint: the government cut 1 lakh 20 thousand crore from capital grants to states. Last year’s allocation was 7.2 lakh crore (which they claimed credit for increasing from 6 lakh crore). The actual spend was much lower, and now they’ve cut further. His view: states at least know where the problems are. If capex must happen, states should spend it, not the Center.

Where the Multiplier IS High: Ayushman Bharat

The professor pivots to Ayushman Bharat as the clearest example of a scheme that should get expanded based on multiplier evidence but doesn’t, because health spending isn’t “tangible” in the same way an airport is.

He cites his own research, recently published in Management Science:

• Methodology: A triple-difference design. He compared border districts of the 4 states that did NOT adopt Ayushman Bharat (Telangana, Delhi, Odisha, West Bengal) versus border districts of states that did (Jharkhand, Assam, etc.). Within those regions, he used the Kisan Credit Card cutoff of 50,000 rupees (above = ineligible) as a regression discontinuity. Three differences: before/after, above/below 50,000, implemented vs. not implemented.

• Finding: NPA rates fell by about 4 percentage points (a ~40% reduction) in eligible populations in implementing states.

• Multiplier estimate: Based on NPA reduction alone (just the banking benefit), the multiplier is around 3. Total multiplier estimate is at least 5.

Yet Ayushman Bharat expenditure per capita is only 1,300 rupees. A family floater health insurance premium for a family of 5 with elders above 60 is around 25,000 rupees in the market. The scheme hasn’t been expanded — still stuck at 5,000–7,000 crore, and in real terms, that’s declining.

“How on earth is a district hospital less important than that stupid airport in some God-forsaken place?”

Rural Schemes & Toilet Economics

The professor makes a pointed observation about tourism: the single biggest thing India could do for tourism is clean public toilets. He notes Swachh Bharat allocations (5,000 crore) see only 2,000 crore spent. Meanwhile, the government launches tourism training institutes. His view: guides are not a market failure — if there’s demand, the private sector will supply them. Clean toilets, on the other hand, are a genuine public good.

Nal Se Jal (water scheme): allocated 60–70 thousand crore, only 10 thousand crore spent. Appears to be getting wound up.

Criticism #2: State Governments Nullifying Federal Progress

The State Borrowing Problem

All the positives of the Union Budget will be nullified by state governments. The Finance Minister has worked hard to cut central expenditure and borrowing. But state governments have actually overtaken the Center in borrowing:

• Central government gross borrowing: ~14 lakh crore (net new: 11.5 lakh crore)

• State governments: Likely to borrow 14 lakh crore as well

This massive combined borrowing means the marginal saver who funds it demands higher rates. The only way to avoid this is printing money (which causes inflation) — and RBI will eventually have to let interest rates rise.

The Cash Transfer Cycle

The professor traces the current fiscal recklessness to a cycle that started with PM Kisan in 2018 and was supercharged by Karnataka’s 2023 election:

• Karnataka: The winning party sent representatives to households with signed guarantee cards — free bus, cash transfers, etc. Politically brilliant; fiscally dangerous.

• Then everyone followed: Telangana, Maharashtra, Bihar all launched similar schemes.

• Big states still to come: West Bengal and Uttar Pradesh haven’t even entered this cycle yet.

The professor draws a parallel to the 2008–14 debt waiver cycle. Every state promised agricultural debt waivers. His published research shows it led to farmers’ access to credit going down, interest rates going up, and farmers becoming worse off. That cycle only stopped when the disaster became visible. He predicts this cash transfer cycle will run for another 3–4 years before a similar reckoning.

The Central Government’s Debt Trap

The professor walks through the budget arithmetic to show the Center is trapped:

• Total expenditure: ~50 lakh crore

• Gross borrowing (fiscal deficit): ~16 lakh crore

• Interest payments: 11.6 lakh crore

• Net fresh capital from borrowing: Effectively zero. All borrowing goes to service past debt.

• Everything else: Funded entirely from tax revenue (~34 lakh crore)

In other words: the government borrows only to pay interest. The country is run entirely on tax revenue. The remaining 4–5 lakh crore from borrowing goes to defense capex and that’s it.

Historical context: At the end of the Clinton administration, the US Congressional Budget Office projected that by 2010 there would be no government bonds because the government was running a surplus. US debt-to-GDP was about 20%. Today it’s 120% and growing by billions of dollars daily. Even after World War II, most countries weren’t at current debt levels.

Criticism #3: The Sovereign Gold Bond Debacle & Trust Erosion

Correlation vs. Causation

Before diving into the gold bond issue, the professor delivers one of his signature methodological rants about the dangers of data-driven decision making without causal theory:

“Wherever there is causation, you may not have correlation. Because you do something else to offset the damn thing.”

His boat-and-rudder analogy: If a boat is sailing and someone is using a rudder to counteract wind, collecting data will show no correlation between rudder movement and boat direction. A naive analyst would conclude the rudder has no impact. But the rudder is precisely CAUSING the boat to stay on course by offsetting the wind. He extends this to criticize the rise of quick data analysis without theoretical grounding.

How the Gold Bond Scheme Went Wrong

In 2015, the government looked at 10–20 years of gold price data showing minimal movement. They ran regressions, saw no trend, and launched the Sovereign Gold Bond scheme: give us your gold, we’ll pay you gold price appreciation + 2.5% interest. The pitch was that gold is “non-productive” and “anti-national.”

The professor’s counter: gold is a technology to preserve savings. Without a way to save the fruits of labor, nobody would work beyond subsistence. Calling gold non-productive is “government trying to fool you to get inflation and then loot your savings.”

Then gold prices surged. The government is reportedly losing 1–1.5 lakh crore on the scheme (the professor notes these are unverified numbers since the government isn’t revealing the figures). They tried to salvage the situation by cutting customs duty on gold, hoping to crash domestic gold prices before bonds came up for redemption. It didn’t work — gold prices are internationally determined.

The Tax Change: Trust Destroyed for 5,000 Crore

Having lost massively on the scheme, the government’s latest move: tax the gains. They introduced a rule that only bonds bought directly from RBI get tax-free treatment, trying to recoup perhaps 5,000–10,000 crore from secondary market buyers.

“For 5,000 crore, for God’s sake 50 lakh crore is the budget. Nothing will happen if your 0.1% deficit goes up. But what you will lose is the trust.”

The professor’s concern is bigger than gold bonds: the government simultaneously offers 25-year tax holidays for data centers. How can anyone trust a 25-year commitment when the government retroactively changes terms on a scheme running for just a few years? This “chindi” (petty) behavior destroys credibility for marginal fiscal gains.

The STT (Securities Transaction Tax) Problem

The Insurance Analogy

The government’s argument for STT: 95% of derivatives traders lose money. The professor’s devastating counter:

“Take any insurance contract. 95% of the people who take insurance lose money — they don’t die! I will put tax on it! It’s insurance for God’s sake!”

His point: derivatives function as insurance. The seller is risk-neutral; the buyer is risk-averse. On average, risk-averse buyers lose money — that’s the definition of risk aversion. But ex ante (before the fact), the insurance provided comfort and value. Saying 95% lose money is like saying 95% of health insurance buyers wasted their premium because they didn’t get cancer.

What the Evidence Actually Says

The professor references O’Hara et al.’s research on Tobin’s Tax (which STT essentially is):

• Finding: When you impose a transaction tax, BOTH informed traders AND noise traders leave the market.

• The real damage: The ones who leave first are the physics PhDs and mathematicians who supply liquidity to the market through careful calculation. Noise traders don’t calculate costs anyway.

• Consequence: Without liquidity, startup founders can’t exit, FDI won’t come. The government doesn’t understand the value of liquidity.

His recommended solution: If you want to prevent small uninformed retail traders from gambling on derivatives, increase the lot size. Don’t tax everyone. Put entry barriers on uninformed participation, don’t destroy market microstructure.

Q&A Highlights

On GIFT City, Dholera & SEZs

An audience member asks about GIFT City’s expanded tax holiday (10 to 20 years in this budget) and whether more GIFT Cities will be created. The professor’s response broadens into a critique of India’s tangible-asset obsession:

• Dholera: Announced by Modi in 2007. Despite his personal push, it took ~22 years to get even partially completed. Expected partial inauguration on February 22.

• SEZ track record: Special Economic Zones ultimately became real estate plays. As long as schemes are about land, buildings, and licenses, they become discretionary and eventually corrupt.

• What we should do instead: Invest in intangibles. The professor references China’s Thousand Talents Program — offering top scientists million-dollar salaries, schooling, facilities to relocate. Why not a city for patent holders instead of another airport?

“The value is created by people, not buildings. Unfortunately all of them will become basically a real estate play.”

On Teacher Accountability & Education Spending

When discussing where budget cuts happened, the professor reveals a contrarian view on education spending:

“If you cannot fix teacher accountability, there is no point in giving money. In education research it’s very clear. The constraint is teacher accountability. No political party has the courage to fix it.”

His argument: giving laboratories to schools where teachers don’t know how to use them is the same capex-ism problem. It’s the same logic as building useless airports. Having studied in a government school himself, he says bluntly: it’s a total waste of money without teacher accountability reform.

Key References & Recommended Reading

• Valerie R. et al., Journal of Economic Perspectives — Survey of fiscal multipliers across government expenditure types

• Victor Davis Hanson, Second World Wars — Technology’s decisive advantage in warfare

• Stephen Kotkin, Biography of Stalin (3-volume series) — Historical debt-to-GDP ratios across countries

• Niall Ferguson, Biography of Kissinger — Nixon-era economic parallels to current US policy

• O’Hara et al., Research on Tobin’s Tax effects on market microstructure

• Prof. Tantri’s own paper, Management Science — Ayushman Bharat’s multiplier effect on NPAs (triple-difference methodology)

• Prof. Tantri’s team, Published papers on debt waiver cycles and farmer credit access

• RBI Document, State Finances — State government borrowing trends

Summary: The Budget Scorecard

Positives

1. Government expenditure declining to ~13% of GDP — First time India is genuinely cutting expenditure alongside tax cuts. Creates space for private sector investment.

2. Defense budget up 20% — Highest-multiplier government spending. Technology spillovers benefit the entire economy.

Negatives

3. Capital expenditure-ism — Schemes not ranked by NPV/multiplier. Useless airports funded over district hospitals and Ayushman Bharat expansion.

4. State governments on a spending spree — Cash transfer cycle will nullify Center’s fiscal discipline. Big states (UP, West Bengal) haven’t even started yet.

5. Trust erosion — Sovereign Gold Bond tax changes and STT increases destroy credibility for marginal revenue. How can 25-year tax holidays be trusted?

The Professor’s Bottom Line

“Net net I don’t see something positive coming out of this because of state governments. The Finance Minister has worked hard. But states will nullify everything.”