Column : Now you see it, now you dont

Written by Subhomoy Bhattacharjee | Updated: Feb 25 2013, 17:59pm hrs
How the finance ministry makes the math work for the two sharp cuts in the fiscal deficit planned for this fiscal and the next will get top billing among all budget news on February 28. Compared to this exercise, individual tax measures or allocations for programmes will figure far lower as points of interest for investors both in domestic and in foreign markets.

The scale of cuts is the largest any finance minister has ordered in the past 15 years in the Indian budget-making process. The two ways this can be done are either through a large hike in the tax base or rates in one of the five major tax streams, or through salami chops on expenditure programmes. Both will be used to some extent, but they will still fall short of producing the numbers the finance ministry will need to come up with to show a 5.3% and a 4.8% of GDP estimate for the fiscal deficit in this and the next fiscal.

Yet this will be possible and the reason for this is that the governments financial statement is far deeply nuanced than the reading of the budget documents usually makes out. Unfortunately, the rest of this piece will be number-heavy because of the topic involved but that is unavoidable.

As an example, in the budget for 2011-12, the government had assumed a rise in capital formation of 21% in the gross capital formation (see table). The aggregate figure at R82,931 crore seemed healthy, but in the revised estimate for budget 2012-13, the number had been sheared to Rs 70,050 crore. The estimated gross capital formation in the current fiscal by the government is R94,906 crore.

This means even if the revised estimate for this fiscal comes in lower, just crawling up beyond R70,050 crore, for the next fiscal it can yield a growth rate of 20% or thereabout, but be moderate in absolute terms so as not to upset the fiscal balance.

Remember, the gross capital formation netted out for replacement expenditure is the basis for calculating the borrowing needs of the Centre. Net capital formation added to the net dis-savings by the government makes up its income deficitthe drag by the government on the savings of the rest of the economy. How did these numbers play out in the last three years

We will return to this later, but for now just check out, for instance, the claimed total expenditure on capital formation by the Centre. The budget estimate for 2012-13 says it is R3,34,978 crore. This is 22% more than the sum for 2011-12. But wait! The biggest share of this is the sum the Centre gives to states for capital formation minus the repayment of interest on loans and others forms the governments total requirement of finance.

Yet each of these items are large or small depending on the classification system that is applied. For instance, transfers to states for creating capital is not the same as splitting the plan support for the states. Grants for capital formation also include gratuities and commuted value of pensions of former state government employees. At R10,798 crore, it is about 0.1% of the Centres fiscal deficit. Sure, this sum cannot be reduced at will, but its role as capital expenditure is open to question.

More interesting is the definition of what makes up capital expenditure. The economic and financial classification of the budget states that 50% of the total grants are assumed to be for capital works. In 2013-14, the sum is R93,695 crore. A year before, it was budgeted at R77,117 but was shaved to R74,271 crore. But that is not necessarily where it will stay. The latest budget numbers show the final figure for the year (2010-11), which began life at R62,305 crore, has ended up at R55,963 crore.

Each downward revision makes the current numbers look smarter in percentage terms.

This brings us to the available balance with the Centre to finance development, the Holy Grail of budget making. The government defines surplus of current revenues over current non-developmental expenditure as a measure of its contribution to finance development. In 2012-13, the surplus available is estimated at R1,80,079 crore. This is a huge jump of 119% over that of 2011-12 when the surplus had dwindled to R82,167 crore.

But a year before, the available data shows the surplus with the government was far better at R1,29,342 crore. The dip in the values in the revised estimates is based on two numbers, a fall in tax revenuesfar more than what the budget numbers showand the huge projected jump in the savings of public sector undertakings. For the last year, it has been reduced by two-thirds from R7,329 crore and a jump in the current year from the reduced base to a massive R20,046 crore.

These sort of mutually balancing changes are the range of underwater propellers that budget mandarins employ to steer the fiscal ship.

A full analysis of these numbers and how they change over the years is beyond the scope of this article. But a final glimpse of the range of possibilities show the extent of corrections that can be made. In 2010-11, the net dis-savings by the government were projected at R1,10,551 crore. This number had again been lowered to R1,04,189 crore in the latest budget document. Meanwhile, the number for 2011-12 projected at R1,40,617 crore has been jacked up to a huge R2,42,007 crore and there must be a reason for such a huge jump in government expenditure, net of subsidies.

As we have pointed out earlier, net dis-savings are the basic building blocks of the fiscal deficit. A higher figure means that the government borrows more. The figure for 2012-13 is back to R1,66,914 crore. A movement southward can do wonders to the fiscal deficit.

As a column on these pages had noted, the key change in the budget-making exercise from this fiscal is the introduction of the hard budget constraint. Deficit figures are sacrosanct from now for Indias budget makers, a fall-out of the scare over a ratings downgrade. The speed of the propellers under the water can be adjusted.