The Hindu Business Line : Budget-making: An exercise in guesstimates

IT IS that time of year when the corridors of North Block are busy with the Budget buzz. The detailed expenditure and revenue estimates would have already come in and the scrutiny of estimates with reference to actuals commenced. The first cut of estimates of total revenue and expenditure from various departments gets completed well before mid-December.

The crucial meetings on detailed estimate of plan outlays are also in full swing. The mandarins of Finance have got already a broad picture of trends of taxes at existing rates and of standing charges — establishment, interest, pension, debt service and the like. Although the process of Budget-making starts from such details, it is the broad picture of Government outlay and how it is financed that makes an impact on Budget day.

The fear of breach of security has been carried to an extreme in the fact that Budget-making has become a mystic art. Mr V. P. Singh, when he was Finance Minister, took up an exercise for involving the public in Budget-making by circulating forms for filling up the "blanks" so to say, given certain essential figures.

Prizes were offered for entries which came close to the final Budget numbers. Naïve as the exercise was, it was well-intentioned and did invite a number of entries. The present exercise I am attempting is an educated guess, at a glance at the Budget, given information in the public domain and known trends.

It is a pity that in spite of computerisation, the figures of actuals of receipts and expenditure do come with a time-lag. As is shown by the Mid-year Review, which came in November 2003, we could only get data up to September.

It would help the accuracy of Budget-making if quick and dirty estimates could be made available based on more nearly timely estimates of revenue and expenditure.

True, the large size and spread of India's government departments makes this a difficult goal. But, with increasing resort to computerisation, accurate figures should become available earlier to make for better Budget-making.

As it is, we have figures only up to September 2003 in the public domain. The Finance Ministry's latest monthly review for November 2003 gives figures up to that month. It is on this basis that we can try to estimate the receipts and expenditure under various heads.

First, let us turn to taxes. The growth of Union excise duties will reflect the growth of manufacturing and the impact of Modvat. Proceeds from Corporation taxes will grow with improvement of operating results of the Corporations. The estimates for 2004-05 can be made on the basis as shown in Table 1 (Tax Revenues).

These estimates are in the nature of educated guesses and I do not lay any claim to the degree of marksmanship usually claimed by Budget-makers, acting as they do on better information.

Under non-tax revenue, the estimate can be fixed as shown in Table 2 (Non-Tax Revenues). The reduction under this head in RE 2002-03 reflects the lower share of profits given by RBI, due to its less than impressive returns on its large forex reserves.

The same trend will continue in 2004-05 also, albeit counter-poised by the higher dividend receipts expected to be nudged out of PSUs under Ministries, like Petroleum and Natural Gas.

The total revenue picture in 2004-05 will come out as seen in Table 3 (Net Tax Revenues). The accuracy of estimation is also a function of the enforcement of measures for better compliance initiated by the tax authorities. It will also reflect the corporate performance, which in turn, depends on the overall performance of the economy — prospects for which appears good.

The expenditure on revenue account is built up mainly out of costs of establishment, interest, subsidies and other items. Not much progress has been achieved in respect of reduction of establishment, although on interest, there has been a conscious effort to effect reductions.

Subsidies are a particularly hard nut to crack, especially with the prospects of nationwide elections. Reduction of subsidies may be a desirable goal, but difficult to achieve politically. Taking these aspects into consideration, BE for 2004-05 may be fixed as given in Table 4.

A more difficult item to estimate is that on Plan (Revenue). It is composed of recurring expenses on Plan items. The size of the Plan is, however, fixed only after detailed discussions, which may well take us up to January 2004. Given the normal trends, the estimates can be set at a percentage increase over the BE 2003-04, as seen in Table 5 (Plan revenue estimates).

The estimate of total expenditure is built up of the summation of myriad estimates of different items. The above is a crude approach to the detailed exercise that goes on in the different offices of Government. These estimates also involve elaborate discussions between the spending Ministries, the Planners and the Finance Ministry. Much politicking goes on behind the seemingly innocent game of fixing expenditure estimates.

Based on the above broad exercise, the total expenditure on revenue account can be estimated as shown in Table 6 (Expenditure). The deficit on revenue account emerges naturally out of the numbers, as in Table 7 (Deficit on revenue account). The revenue deficit on our estimates is more or less on the same level as in 2003-04, thanks to rise in expected receipts.

The Finance Minister has, however, to find the resources not only to meet the capital expenditure, but also the deficit on revenue account — the sum total of deficit on revenue and capital expenditure

The fiscal deficit for 2004-05 will be a high figure. Capital expenditure on defence is likely to be high, given the large attractive offers made by Defence industries of various countries. While they offer loans, the problem of fiscal deficit, however, remains. The dreams of our army top brass to get the latest defence toys from abroad will finally impinge on fiscal deficit, howsoever it be financed.

The prospects of deficit being high are particularly dependent on the ensuing polls, which make it attractive for Finance Minister to go slow on taxes and fast on expenditure. Hopefully, the pace will be faster in respect of the right type of investment expenditure, which will help bridge the gaps in infrastructure and not on unproductive subsidies and decorous establishment.

The promise of a thaw in Indo-Pakistan relations should also yield a peace dividend in terms of reduced defence outlays. Time alone will tell how this play out.

While the Budget which the Finance Minister presents on February 29 will be rich in promises and programmes, it will be principally judged on the progress it makes in respect of reduction of deficits and in the quality of expenditure included.

It is easy to go euphoric on a Budget full of promises of reform. But the hard reality is what it brings out on fiscal deficit and on measures to achieve reductions in unwise expenditure of a revenue nature.

As the figures stand, the prospects of a flashy Budget are bleak. The Finance Minister's hands are tied, caught as he is between a rock and a hard place, the pull of elections and the need for reforms. Here is to hoping that, come Budget day, Mr Jaswant Singh will bring a pleasant surprise — a Budget that pleases but yet continues the reforms at a decent pace.