Column: Let budget planning be more realistic

Written by Madan Sabnavis | Updated: Feb 25 2013, 17:52pm hrs
This begins with more honest estimates of growth and extends to a tight rein of expenditure

The presentation of this years Union Budget will be unique because most analysts have already prejudged the content on grounds of it being the last Budget before the general elections, which will give a tilt to populism. A populist Budget is one that is extravagant in terms of spending while giving benefits through tax breaks, hence putting austerity under jeopardy. Is this a likely scenario

The answer is that it is unlikely that there will be profligacy in the Budget given that we have a very astute finance minister who has been working hard to rein in the fiscal deficit for FY13. Let us see what all he has done. With tax revenue not rising given low economic conditions, he has cut down on expenditure. There is now some talk that the fiscal deficit number may be closer to 5.1% rather than 5.3%. The disinvestment plan has taken off suddenly and the R30,000 crore target could be met by March. The spectrum sale of R40,000 crore and the subsidy slippage of around R60,000 crore could be problem areas, which are being countered through expenditure cuts. While this is a different way of controlling the fiscal deficit, such a strategy affects growth in the medium term when development expenditure is pruned.

Budgets are basically accounts of the government that have evolved over the years to be the growth-driver through their proposals. Non-development expenditure involves transfer payments that are growth-neutral unlike development expenditure that is Keynesian in spirit. Tax incentives are used more on the supply-side to push up growth while expenditures work directly. If the finance minister actually brings the deficit down to 5.1% this year, it would be a clear compromise on growth. In fact, one of the shortcomings of the efficacy of budgets is that finance ministers tend to cut back on expenditure to control the deficit, which actually affects medium-term growth prospects. Therefore, ideally, expenditure cuts towards the end of the year, though pragmatic, should be eschewed.

The crux of the problem lies in assuming a high growth rate when formulating the Budget. Once we assume a high GDP growth number, which is 14% normally, then tax revenues tend to get exaggerated as excise, customs and corporate tax collections are dependent on this rate. Revenue accrues during the course of the year, but expenditures are incurred in blocks when it involves projects. Also, there is ambivalence over the subsidy bill, which skews conditions. Add to this the inability to get through spectrum sale or disinvestment programmes and there is a crisis-like situation by the end of the year. Budgets always tend to overestimate revenue and underestimate expenditure, which is the starting point of fiscal woes.

Given these issues, what could be a route taken by the finance minister First, a reasonable GDP growth should be assumed at 12% with 6% growth in GDP and inflation, which looks likely. The cushion of spectrum sale may not be likely and disinvestment should be based on realistic scenarios where a time table should be laid down so that it does not look as if it has been forced on institutions, which is the impression formed today. Ideally, not more than R20,000 crore should be targeted, which have been the highs obtained in FY10 and FY11.

Second, expenditure should be planned with caution. The subsidy bill, which was to be around R1.9 lakh crore, should not be allowed to be surpassed. It must be earmarked for every month and should come to a halt once the level is reached. Also, the number should be realisticlast year, an average crude price of $115/bbl was assumed, yet the target was exceeded. How could this have happened unless the demand was understated If cash transfers are being planned for PDS, then the food procurement policy of the government has to be made finite. A positive development has been to link diesel prices with the market, which will help control growth in fuel subsidy.

Third, payments under interest subvention (under subsidy), loan waivers (on account of drought) and MGNREGA should be capped with zero flexibility.

Fourth, the allocations made for agriculture, warehousing, land development should be limited to prudence. It should be realised that our approach has been more piece-meal rather than a sustained effort, which ultimately means that we are unable to bring about any real development in these sectors. Also, there are a plethora of schemes where it is a habit to announce outlays without paying much attention to the quality of the serviceeducation, women, healthcare, rural housing, to name a few. Last year, we have an allocation of almost R2.5 lakh crore on various schemes where there is no audit on what reaches the targeted groups while we get only numbers of the number of beneficiaries.

Fifth, as the government has problems garnering resources, it makes sense to get away from recapitalising banks and instead mandate them to raise resources on their own. This will help the banks as well as the market. There can be savings of R15-20,000 crore.

Last, the project expenditure, which was to be around R1 lakh crore, should also be incurred from month one rather than wait till the end and pruned when conditions go awry. This way, budgetary targets will be adhered to.

Today, the government has tended to follow the policy of lazy budgeting where no effort is made to rein in non-development expenditure, even as we begin with unrealistic growth numbers. By sticking to the budgeted numbers for expenditure, we can ensure that we get out of this syndrome and yet maximise the efficiency of funds. All this may also mean cutting down on the size of the budget instead of increasing it more out of habit. In fact, for FY13, it was assumed that tax revenue would be 10.7% of GDP as against 10% in FY12. This automatically puts the entire Budget on the edge as it becomes susceptible to slippages.

Quite clearly, our approach to formulating and implementing budgets must change to avoid falling into the deep crevice of lazy budgeting where the exercise by the end of the year is more for an accountant than for an economist.

The author is chief economist, CARE Ratings. Views are personal