Will FinMin break from the past to end under-budgeting for subsidies, pensions?

In the Budget due very soon, Finance Minister Arun Jaitley must refrain from under-budgeting for subsidies and pensions. These two have a critical role in deciding if the fiscal deficit target is achieved or not.

In the period between 2004-05 and 2013-14, the budgeted figures for subsidies and pensions have been under-estimated, when compared with the actual figures disclosed a year later. The budgeted subsidies varied from the actual numbers by an average 30.4 per cent and pension figures, by 21.3 per cent.

“It’s a clear-cut case of systematic under-budgeting, which, in turn, raises fingers on the credibility of the whole budgeting process,” says Abheek Barua, Chief Economist at HDFC Bank. Economists think that the obsession over achieving the FRBM (Fiscal Responsibility and Budget Management) targets has made budgeting a frivolous exercise — intended to appease international rating agencies and investors.

In the past, the petroleum subsidy comprised a chunk of subsidies. But with the deregulation of petrol and diesel prices, this element is now much lower. Even so, the price of crude oil assumed for the next fiscal will play a role in deciding the deviation in the budgeted and actual subsidy numbers.

“Conservative budgeting would need oil to be pegged at $40-plus a barrel and not $20,” says Indranil Pan, Chief Economist at IDFC. While the petroleum subsidy might be lower than before, any oil price spike could affect fertiliser subsidy, he warns.

Pension is another ticking time-bomb. In 2016-17, implementing the recommendations of the Seventh Pay Commission and One Rank One Pension (OROP) scheme would require providing for about ₹1.10 lakh crore. And, of this, ₹33,700 crore would be for the hike in pensions alone, according to the Seventh Pay panel report. And if the government continues with its conservative budgeting process, it could be in for some surprise over the next few years. This is because when the Sixth Pay panel recommendations were implemented in 2008-09, there were large differences between the budgeted and the actual pension figures in the initial years, before tapering off later.

“Intuitively speaking, it might be due to many government employees opting for early retirement — lured by attractive monetary compensation,” added IDFC’s Pan. In addition, arrears also got paid out, which added to the spending on pensions.

It doesn’t help that about 29 per cent of the Centre’s 3.3 million workforce is in the age bracket of 50-60 years.It is perhaps because these two heads of revenue expenditure always overshoot the budgeted amount that the Centre cuts back its capital expenditure. “Also, all assumptions for arriving at the numbers should be clearly stated,” says HDFC Bank’s Barua.

Whether the current government would want to rise above the political economy to put up a realistic Budget, wait till February 29.

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