Budget numbers can be easily ‘managed’

The Union Budget is a much talked about and debated document as it unveils the government’s policy initiatives as well as its fiscal roadmap. There are debates on whether or not fiscal targets will be met, as they have become fairly sacrosanct when it comes to evaluating the Budget. In the absence of such norms things could have gotten quite chaotic, which was the case until the FRBM (Fiscal Responsibility and Budget Management Act) came into existence.

Even so, the view here is that the Budget is largely a statistical exercise, which can never be precise as it is based on various assumptions of how the economy will behave. Moreover, all these numbers are quite manageable under most conditions; hence it is not surprising that we are always close to the targeted ratios at the end of the year. Let us see how this works.

System of accounts

First, the system of accounts for the government is cash based which means that if money is paid it is an expense while if it is not, it does not enter the Budget. Intuitively, it can be seen that expenditures can be rolled over to the next year to ensure that the targets are met.

It is not surprising that the April and May monthly accounts always show spikes especially for subsidies where the concerned payments are made the next year. Such rollovers have become a habit as has been recently highlighted by the CAG.

Second, revenue can also be touchy at times. Here there is a tendency to defer refunds during the year and often when it becomes onerous, queries are sent to the taxpayer so that legitimate delays can be justified. The respondent can be given 15-30 days to respond with the notice being sent on the 15th of the month, which provides room to push it to the next quarter.

This is a common occurrence during the course of the year and at times is pushed to the next year too so that the net tax collections remain high.

Third, when things get really tough, the government has the prerogative to cut back on discretionary expenditure which is done quite dexterously. The Budget is now unveiled on February 1 and hence the revised numbers which are presented can be different from the actual numbers when one looks at the internals and hence normally the axe falls on capex.

This is relatively less controversial as it is not obvious. Further at times even after the project commences, the payment is made in the next year which fulfils both the objectives.

Out of sight

Fourth, as the CAG has pointed out when reviewing the 2016-17 Budget, there are several ‘off Budget’ items that are not placed in the public domain.

Here a government organisation like the FCI takes on some borrowing to meet its funding which is compensated later by the government when the rolled over subsidy is paid. This is an effective way of keeping expenditure under control.

Fifth, the Budget speech invariably talks of high expenditure on various infra projects for which provision is never seen in the accounts. This happens as the money is raised by PSUs in the financial space like PFC, REC, NHAI etc. where credit is taken in the Budget but executed by these institutions which are independent. There is fundamentally nothing wrong given the ownership is with the government, but the liability is not counted under either the fiscal deficit or the outstanding liabilities of the government. These numbers are mentioned in one of the many documents but the reader has to join the dots after reading through the lines.

Disinvestment bonanza

Sixth, disinvestment is always a big ticket for the government and in the near past has almost always been successful, as this is more like a conjurer’s trick where the magician knows what will come out from the hat. Getting one PSU to buy into another is an effective way of meeting such targets and is used well.

These disinvestments are a way of transferring the surplus funds which can go from the reserves of these companies to buy other government companies. This is the idea behind the government eyeing RBI’s reserves.

Seventh, several PSUs (also RBI) can be made to pay an interim dividend which helps to shore up non-tax revenues. This is a useful way of getting in funds and while the PSU may finally pay the same dividend the next year, the process of rolling over interim dividend can be continuous. But generally it tends to be a higher dividend and not a rollover as these units generate surpluses given the nature of their near monopolistic business.

Bank recap

Eight, last year, the idea of recapitalising PSBs was a masterstroke in financial engineering. Here the government floats recap bonds which are bought by banks without any money flowing because the same money gets reinvested into the subscriber. This way the only cost, which is the interest payment, is taken on by the government. This was done at the State level too when the UDAY bonds were floated.

Nine, a closer look at the Budget document also talks of the drawdown of cash reserves which actually are balances kept with the RBI. When expenditures are not incurred then the money collected through say a cess sits as a cash balance which can be drawn down any time.

This way the gross borrowing programme is not touched and hence the outstanding liabilities are kept down.

Last, by renaming schemes and highlighting new projects especially in agriculture or social welfare, the reader gets a feeling that a lot of money is being spent with the overall Budget sanctity remaining intact. Here the existing schemes are removed and the amounts transferred to the new scheme.

These practices have been used over the years and it would be interesting if the Budget actually provide details on them every year. This will make the exercise more transparent if stated upfront.

The writer is Chief Economist, CARE Ratings. Views expressed are personal.

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