Pranab’s ‘UB 12’ budget relies on heavy dose of creative accounting

The Union Budget 2011-12 (UB 12) has been presented to the Parliament against the back drop of higher growth trajectory. The dip that was caused due to global economic crisis has nearly been overcome. The aggregate growth performance of the three sectors of the economy- agriculture, industry and services has been a matter of solace. The budget expects that the economy will move to double-digit growth in near future.

The major SWOT analysis of the economy: Strength: Unaffected growth rate; Weakness: Corruption and weak delivery of public goods and services, low public/ private accountability; Opportunities: Global recovery mainly in the US/ EU; Threats: sticky and stubborn inflation and higher current account deficit mainly due to international oil prices; Thrust areas: Industry (FDI/ FII Investment limits in domestic Mutual Funds / Infrastructure), and Rural development.

Against the above backdrop, the claim of UB12 that fiscal consolidation has been impressive is highly unconvincing. The essential element of the fiscal consolidation is to eliminate revenue deficit, bring down fiscal deficit to 3 percent during the medium term say by 2014- 15. However, the medium term path indicated by the government has not been that encouraging, particular regarding revenue deficit correction.

The budget 2011- 12 has estimated revenue deficit relative to GDP at 3.4 percent at the same level of 2010- 11. Since the government failed in its endeavour to reduce revenue deficit it has created some creative accounting to introduce a new concept of Effective Revenue Deficit ( ERD). The ERD adjusts the grants given to the states for capital assets. Therefore, it is claimed that these grants are of capital expenditure and should not figure in calculation of fiscal deficit.

Accordingly, the ERD is estimated at 1.8 percent of GDP as against the revenue deficit of 3.4 percent. This is erroneous accounting. Grants when received by States translated as non- tax revenues and funds being fungible it is difficult to ascertain the end- use of such funds. More over, even one considers the revenue deficit as normally defined the medium term projection has not been encouraging at 2.7 percent for 2012- 13 and 2.1 percent for 2013- 14.Revenue deficit relative to GDP in 2011- 12 being placed at the same level of 2010- 11 of 3.4 percent, reduction of fiscal deficit from 5.1 per cent of GDP to 4.6 per cent is budgeted to be materialized through higher disinvestment proceeds and lower capital expenditure. These are techniques normally followed to reduce fiscal deficit.

The third deficit indicator that is primary deficit which is key to sustainable fiscal policy and is budgeted at 1.6 percent implying a long distance to be covered by the government to achieve fiscal sustainability. From the above magnitude of deficit indicators, the implications are worth noting. Persistence of revenue deficit would mean negative savings for the government and will have adverse implications for growth. Similarly, persistence of primary deficit will have adverse implications for fiscal sustainability, even though government has claimed that debt- GDP ratio has been budgeted lower.

Fiscal deficit reduction at the cost of capital expenditure will have adverse implication for growth. Thus, in a nutshell, fiscal consolidation framework without strong revenue deficit correction will not be encouraging for sustainable growth and also fiscal sustainability.

It is announced that in the course of the year the Central Government would introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years. In this context it is suggested that revised road map should refrain from the concept of effective revenue deficit. Instead, it would be appropriate to introduce a road map for primary deficit along with revenue deficit, fiscal deficit and debt. The announcement of Public Debt Management Agency of India Bill in the next financial year is a welcome measure but needs to be drafted with utmost care as the fiscal consolidation has not been fully achieved A separate organization to manage the public debt than the Reserve Bank of India needs careful evaluation in terms skill management.

The budget states that the extant classification of public expenditure between plan, non- plan, revenue and capital spending needs to be revisited. In this context, it may be noted that accounting classification changes is not true expenditure management. Government needs to have a roadmap to reduce interest payments, rationalize subsidies and provision for capital expenditure.

As regards the tax revenue, the budgeted growth of 18.5 percent in gross tax revenue on the top of an increase of 26 percent in 2010- 11 looks difficult to be achieved similarly, Rs. 40,000 crore, disinvestment proceeds is on the higher side. Government is pessimistic on the non- tax revenue. Some initiatives should have been taken to enhance non- tax revenue to sustain fiscal consolidation.

The size of the cake (expenditure of BE 2011- 12 over RE 2010- 11 is slightly over 3 percent and when one accounts for an inflation of about 8 percent, the net size of the proposed budget is smaller as compared to the F 2010- 11. This has been based on an expected disinvestment proceeds of nearly (non- debt capital receipts of Rs. 40000 crore). The realization of this amount needs to be watched, as it is nearly double that of the disinvestment proceeds of the present fiscal. Healthcare sector and basic education have not been accorded the deserving outlays, as they play a very crucial role in the sustenance of our economic growth.

A lot of expectations were there on improving the agriculture sector, but surpassingly mere concessions to compliant farmers who repay their loans were announced. But as far input subsidies and marketing- related issues are concerned, the budget has remained silent except improving the cold storage from which the average Indian farmer gets no relief.