Month: March 2016 | Page 9

1 March, 2016

Jaitley’s Fiscal Deficit Numbers Don’t Really Add Up

Dear Reader,

By the time you read this piece, you would have been bombarded with a huge amount of analysis on the budget the finance minister Arun Jaitley presented yesterday.

Nevertheless, most such analysis misses out on carefully looking at the fiscal deficit number, which is basically what the budget is all about. Most other things that finance ministers talk about in their budget speeches, they can talk about on any other day of the year as well.

In fact, regular readers would know that I have been sceptical about the ability of the government to meet its fiscal deficit target. Fiscal deficit is the difference between what a government earns and what it spends during the course of any year. The difference is met through borrowing.

While presenting the budget last year, the finance minister Jaitley had said that the government expects to achieve a fiscal deficit target of 3.5% of GDP for 2016-2017 and 3% of GDP for 2017-2018.

In the budget presented yesterday Jaitley said that: “I have weighed the policy options

and decided that prudence lies in adhering to the fiscal targets. Consequently, the fiscal deficit in RE[revised estimate] 2015-16 and BE[budget estimate] 2016-17 have been retained at 3.9% and 3.5% of GDP respectively.”
The question is how realistic is the 3.5% of GDP fiscal deficit target for the next financial year? There are essentially three inputs that go into making the fiscal deficit number. The total receipts of the government, the total expenditure of the government and the nominal GDP number that has been assumed for the next financial year. Nominal GDP is the GDP which hasn’t been adjusted for inflation.

Let’s start with the receipts number. Jaitley has assumed that the government plans to collect Rs 56,500 crore through the disinvestment route. Of this, Rs 36,000 crore will come from the government selling shares in the companies its own and Rs 20,500 crore from the stakes that it has in non-government companies.

The total number assumed to come in through the disinvestment route is more than double of the Rs 25,312 crore that the government collected through the route this financial year. It needs to be pointed out here that a substantial part of this came from the Life Insurance Corporation(LIC) of India picking up stakes in government owned companies. Honestly that can’t be called disinvestment. It is money moving from one arm of the government to another.

Second, last year the government had assumed that Rs 69,500 crore would come in through disinvestment. Ultimately, only Rs 25,312 crore has been collected and that also after LIC had to come to the rescue. One excuse offered for the government going slow on disinvestment was low commodity prices. Commodity prices continue to remain low.

Given this, the Rs 56,500 crore disinvestment number is an overestimate like was the case last year as well.

The government has also assumed that it will earn Rs 98,994.93 crore from the telecom sector. This receipt comes under the entry “other communication services” and is primarily the money the government will earn through telecom spectrum auctions. Again, like is the case with disinvestment receipts, this number is a huge jump from the Rs 57,383.89 crore that the government managed to collect this year.

Given, the past record of the government, these assumptions are clearly looking overoptimistic. Also, they help in under-declaring the fiscal deficit. As per IMF norms, any kind of asset sales by the government needs to be treated as a financing item and not as a receipt as the Indian government does. In the process the government manages to come up with a lower fiscal deficit number.

Now let’s take a look at the expenditure front. There is no clarity on how much allocation the government has made towards implementing the recommendations of the Seventh Pay Commission. As Jaitley said during his speech: “the Seventh Central Pay Commission has submitted its Report. Following the past practice, a Committee has been constituted to examine the Report and give its recommendations. In the meantime, I have made necessary interim provisions in the Budget.”

The finance minister didn’t get into any more details. Nevertheless, one can use the numbers given in the budget and see if the right kind of allocation has been made. During 2015-2016, the government’s salary and pension bill (excluding Railways) is expected to be at Rs 1.85 lakh crore.

In 2016-2017, the government’s salary and pension bill has been budgeted at around Rs 2.25 lakh crore. This is Rs 40,000 crore more than the 2015-2016 number.

The Seventh Pay Commission recommendations come into force from January 1, 2016. The Seventh Finance Commission had said that its recommendations would cost the government Rs 73,650 crore during the first year. To this one would have add the cost of Pay Commission recommendations between January and March 2016, which would be needed to be paid as arrears to the government employees and pensioners.

This works out to Rs 18,412.5 crore (Rs 73,650 crore divided by four). Hence, the total extra allocation towards implementing the recommendations of the Seventh Pay Commission should have been around Rs 92,000 crore (Rs 74,650 crore plus Rs 18,412.5 crore). The actual increase in allocation towards salaries and pensions is only around Rs 40,000 crore.

What does this tell us? The government is probably not in the mood to pass on the entire increase in salaries and pensions during the course of 2016-2017. If it does that, then it will have to pay arrears in the years to come and that will add to the government expenditure and hence, the fiscal deficit. So to that extent the fiscal deficit is being under-declared at this moment.

Also, the implementation of one rank one pension in the defence forces is expected to push the pension bill up, by Rs 10,000 crore. And that will also add to the salary and the pension bill of the government.

Further, as I have pointed out in the past, more than Rs 1,00,000 crore of food and fertilizer subsidy bills remain unpaid. And that is how it continues to be. The allocation to food and fertilizer subsidy has fallen from Rs 2.12 lakh crore in 2015-2016 to Rs 2.05 lakh crore in 2016-2017.

What does this mean? It means that while the government will pay the Rs 1,00,000 lakh crore of pending food and fertilizer subsidy bills, it will then have to postpone paying a large part of the food and fertilizer subsidy expenditure that is incurred during the next financial year.

The government follows the cash accounting system and only acknowledges expenses once payment has been made. This has led to a situation where subsidy payments to Food Corporation of India(FCI) and fertilizer companies remain unpaid. The money has been spent by FCI and the fertilizer companies towards subsidy, but remains unpaid by the government, and hence is not acknowledged as an expenditure.

The question is where does FCI get this money from? It borrows from the financial market. Why does the market lend money to FCI? It does that because it knows that it is effectively lending money to the Indian government. Hence, this subsidy expenditure has already been incurred by the government but has not been accounted for.

This essentially leads to a lower fiscal deficit number. Further, the absolute fiscal deficit number of Rs 5,33,904 crore looks very unrealistic given that the receipts of the government have been overstated while the expenditure has been understated.

Now let’s talk about the denominator in the fiscal deficit number, the nominal GDP. The nominal GDP for 2016-2017 has been assumed to be at Rs 15,065,010 crore assuming 11% growth over the 2015-2016 number. How realistic is this assumption? In 2015-2016, the nominal GDP is expected to grow at 8.6%. Given this, how realistic is an assumption of 11% nominal GDP growth for 2016-2017?

To conclude, it is safe to say that Jaitley’s fiscal deficit number is not believable. As the American professor Aaron Levenstein once said: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.”

What Jaitley has managed to conceal is vital.

The column originally appeared on the Vivek Kaul Diary on March 1, 2016

1 March, 2016

Mr Modi where has minimum government gone?

Promises are meant to be broken, especially in politics.

Narendra Modi, the prime minister of India, in the run-up to the 2014 Lok Sabha (the lower house of Indian Parliament) had promised “minimum government and maximum governance” to the citizens of India.

He has clearly forgotten the minimum government bit of that promise. At least that is the way it seems from the third annual budget, for 2016-2017, presented by Arun Jaitley, the finance minister in the Modi government.

The allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a scheme of which Modi has been severely critical of in the past, has been set at Rs 38,500 crore ($5.62 billion) for 2016-2017.

This is the highest allocation ever to the scheme. The scheme guarantees work for 100 days in a financial year to every household whose adults are willing to do unskilled manual work. The trouble is it doesn’t lead to the creation of any useful assets and hence, more or less works as a dole.

Also, the scheme doesn’t benefit many of those it is intended for. The economist Surjit Bhalla has called MGNREGS as the fourth most corrupt institution in the world after FIFA, the BCCI (the institution that governs cricket in India) and the public distribution system used by the Indian government to distribute food grains as well as kerosene to the poor.

The allocation to food subsidy stood at Rs 1.35 lakh crore($19.7 billion) down a little from Rs 1.39 lakh crore($20.3 billion) last year. The government sells rice, wheat and sugar at subsidised rate through 5.5 lakh( 0.55 million) fair priced shops, which form the public distribution system, throughout the country. The trouble is the system is extremely leaky and a huge proportion of the food grains are siphoned off and get diverted into the open market.

A committee to fix up this system was set up very soon after the Modi government came to power. It submitted its report in January 2015. The recommendations of the committee haven’t been taken on.

The government also sells fertilizers to farmers at a subsidised price. The subsidy towards this has marginally fallen to Rs 70,000 crore ($10.2 billion) from Rs 72,438 crore ($10.6 billion) during the last financial year. This small fall is because of a fall in fertilizer prices. This system is also extremely leaky and only around 35% of urea (a kind of fertilizer) actually reaches the small and marginal farmer it is meant for.

The same is true about kerosene as well, which the government distributes through the fair prices shops. Nearly, 46% of the kerosene is siphoned off. The allocation towards petroleum subsidies this year is at Rs 26,947 crore ($3.9 billion) against Rs 30,000 crore ($4.4 billion) during the last financial year. But what needs to be kept in mind is that oil prices have fallen during the last one year.

What this tells us very clearly is that as far as subsidies are concerned Narendra Modi has been no different from his predecessor Manmohan Singh and continues to run full throttle, what is a very leaky system.

Further, the government continues to own 27 banks. Since 2009, the government has invested around Rs 1.02 lakh crore in these banks to recapitalise them. The banks have given loans to crony capitalists close to the previous government, which they are now unable to recover.

For the next financial year, the government has allocated a further Rs 25,000 crore ($3.65 billion) to be invested in these banks. Jaitley also said that “if additional capital is required by these Banks, we will find the resources for doing so.”

What Jaitley meant here was that the government would do “whatever it takes” to keep these banks going.

The question that Jaitley did not answer is—why does the government need to own 27 banks? Over and above this, the government continues to own and run loss making companies. Until March 2014, the accumulated loss on these companies was Rs 1.04 lakh crore.

The government continues to own, a loss making airline, a loss making telecom company, a loss making scooter company, loss making hotels and so on. In his speech Jaitley did talk about strategic sale of government owned companies. But the past record of the Modi government (or the other governments before it) has been quite shaky on this front.

The government has also talked about selling some assets of these firms. As Jaitley said, we will encourage these companies to “divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects.”

The government also decided to set up a Higher Education Financing Agency (HEFA) with an initial capital base of Rs 1,000 crores. As Jaitley said in his speech: “The HEFA will be a not-for-profit organisation that will leverage funds from the market and supplement them with donations and CSR funds.”

The question here is why not just allow education to be run as a for-profit business, legally. Currently, most private education institutes in India are owned by politicians, and are conduits as well as generators of black money. Black money is essentially money which has been earned but on which taxes have not been paid.

What this means is that at least the “minimum government” part of Narendra Modi’s “minimum government maximum governance” has gone for a toss. Like most electoral rhetoric it has been abandoned—lock, stock and barrel.

Now this doesn’t mean that there was nothing good in the budget. Here are some of the good points. The government buys rice and wheat from the farmers directly at a price referred to as the minimum support price. The benefits of this direct buying are concerned by farmers in a few states like Punjab, Haryana, Andhra Pradesh etc.

The government has plans to extend procurement of food grains to other parts of the country. It has plans of setting up an online procurement system through the Food Corporation of India. Given that, a government benefit is available, it should be available throughout the country and not only in certain states.

A major problem that the Indian farmer faces is getting his produce to the market before it goes bad. As the finance minister Jaitley said in his speech: “A lot of fruits and vegetables grown by our farmers either do not fetch the right prices or fail to reach the markets.”

In order to tackle this the government plans to implement the “Unified Agriculture Marketing Scheme which envisages a common e-market platform that will be deployed in selected 585 regulated wholesale markets.”

Another interesting move in order to tackle produce going bad is allowing “100% FDI…through FIPB route in marketing of food products produced and manufactured in India.”

One of the major successes of the Modi government since coming to power has been electrification of villages. As of April 1, 2015, 18,542 villages were not electrified. Between April 1, 2015 and February 23, 2016, 5542 villages were electrified. This was more than the total combined achievement of the last three years. Also, the government has promised 100% electrification by May 1, 2018.

The government is also trying to create jobs and plans to invest Rs 2,18,000 crore in roads and railways during the course of the year.

To conclude, while the government is trying to do the right things on many fronts, but by trying to run every business possible, it is just overextending itself.

And that is something that could have been easily corrected in this budget. Sadly, an opportunity has been lost.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Khaleej Times on March 1, 2016, with a different headline.