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Budget: misleading numbers

There were no expectations of any fiscal reform in the Central budget this year but one had hoped for some basic fiscal prudence even in a pre election budget. The budget has belied even this modest hope. Its misleading numbers and wrong signals raise apprehensions of potential damage in the fiscal and economic areas.

The figures for budget deficits are gross understatements. The gap between revenue and expenditure is the budget deficit and this is financed by borrowing. But in the latest budget revenue deficit has been computed after omitting huge items of government expenditure. Some glaring examples can be cited.

Instead of reflecting the oil, food and fertilizer subsidies as expenditure from revenues, the government is financing these by issue of bonds, that is, by borrowing without showing a deficit. A sketchy and cryptic footnote is all there is in the ‘Budget at a Glance,’ indicating only a small amount of Rs. 18,757 crore as an off-budget item, that too only under the revised estimates for 2007-08. This superficial and belated attempt has presumably been made following critical comments in the Press on this type of fudging. (Reference to this was made in these columns on December 3). It is difficult to locate the precise amount as there is no specific indication in the supporting budget documents.

There is no denial that the understatements and arrears payable on account of these off-budget loans, not shown as deficits, are massive (placed around Rs. 1 lakh crore), considering the high prices of crude oil and local and imported foodgrains.

Another instance of avoiding showing expenditure in the budget is the issue of special marketable securities to State Bank of India for Rs. 9,995.95 crore during this year which was approved recently by the Cabinet. This is to enable the Government to subscribe to SBI’s rights issue to raise additional capital from the market. This should have been exhibited as capital expenditure to acquire shares and reflected as fiscal deficit financed by borrowing. This was not done thereby helping to show an artificially reduced deficit.

There are two other items of massive expenditure that have not been provided for in the budget. The Sixth Pay Commission report for Central government servants is due for submission. The last Pay Commission in 1996 was a fiscal disaster for the Central and State governments. The Sixth will be no different.

In fact, the combined burden of revised pay and pension may be more this time. The budget provision in 2008-09 for payments to civil servants including the Railways and excluding Defence personnel even at existing rates is huge — Rs. 51,782 crore for pay and allowances and Rs. 25,085 crore for civilian pension excluding railway employees, without any provision for the impact of the new Pay Commission.

As for the scheme of debt waiver and debt relief for farmers, four crore farmers are to benefit and the implementation will be completed by June 30 this year. This election related scheme will definitely have a serious impact on the budget in 2008-09 for which no provision has been made. The Finance Minister’s weak defence of the device of off-budget initiatives to show better fiscal health of the government lacks consistency with past accounting practice. This is wholly unacceptable as the country’s government budgets are only cash budgets.

In his budget speech, the Finance Minister said, “I am happy to report that the revenue deficit for the current year will be 1.4 per cent against BE of 1.5 per cent… Members will note that not only will I achieve the target for fiscal deficit under the FRBM Act, I have also left for myself some headroom.” The implied complacency is that budgetary deficits can be easily controlled without any hard policy decisions and actions to reform the whole gamut of expenditure and revenue mobilisation practices. The list of such areas crying for corrective action is well known and these have been repeatedly highlighted in these columns. Only a fiscal crisis can dispel such a notion but then the country may have to pay a heavy price. The write-off of bank loans will also send negative signals. It interferes with the autonomy of commercial banking. It will generate a climate of default on loans. Loan melas of the past are still fresh in the memory of public sector banks. One surprising revelation in the budget speech is the need to put in place effective monitoring, evaluation and accounting systems to get outcomes from the over 1,000 Central Plan and centrally sponsored schemes.

The solution proposed is to set up a brand new organisation, CPSMS, in the Planning Commission.

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