Vivek Kaul
The finance minister P Chidambaram hasn’t crossed the “red line” of achieving a fiscal deficit target of 4.8% of the gross domestic product (GDP), that he had set for the government when he presented the last budget in February 2013. In fact, he has done even better and achieved a fiscal deficit of 4.6% of the GDP.
Fiscal deficit is the difference between what a government earns and what it spends, expressed as a percentage of the GDP. There are essentially three variables that are involved in calculating the number. The amount the government earns. The amount the government spends. These two numbers form the numerator and their difference is then expressed as a percentage of the GDP.
Hence, in order to achieve a targeted fiscal deficit, any of these three numbers can be manipulated. Chidambaram has worked on two of these three fronts to arrive at a fiscal deficit target of 4.6% of the GDP.
Let’s start on the expenditure front. The government expenditure is categorised into two kinds—planned and non planned. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government can at best delay paying subsidies. Hence, when expenditure needs to be cut, it is the asset creating planned expenditure which typically faces the axe and that is not good for the overall economy. If one looks at the numbers that is the direction they point towards.
The planned expenditure target of the government was at Rs 5,55,322 crore. The actual planned expenditure has come in at Rs 4,75,532 crore, which is close to Rs 80,000 crore or 14.4% lower. This as mentioned earlier is not a good sign.
If the government had incurred this expenditure the actual fiscal deficit would have come in at close to 5.3% of the GDP.
When it comes to non planned expenditure the target was at Rs 1,109,975 crore. It came in around 0.44% higher at Rs 1,114,902 crore. Most of the non-planned expenditure is regular in nature and hence, like planned expenditure, cannot be done away with. But there is one accounting trick that the government can resort to even on this front.
It can postpone the payment of petroleum, food and fertilizer subsidies to the next financial year. Let’s take the case of petroleum subsidies for one. Rs 65,000 crore had been allocated on this front. The actual amount spent by the government has come in at Rs 85,480 crore. Of this amount a major chunk has gone towards payment of under-recoveries from the financial year 2012-2013 (i.e. the period between April 2012 and March 2013).
Hence, the amount allocated is clearly not enough for the payment of petroleum subsidies. In fact, data from the Ministry of Petroleum and Natural Gas suggests that the oil marketing companies have reported under-recoveries of a total of Rs 1,00,632 crore during the first nine month of 2013-14 (April-December) on the sale of diesel, PDS Kerosene and cooking gas.
So clearly the amount of Rs 85,480 crore earmarked in the budget is not enough. This means that the payments that need to be made on this front have been postponed to the next year. A recent article in the Business Standard estimates that subsidies of around Rs 1,23,000 crore will be postponed to the next financial year.
These are subsidies on petroleum, food and fertilizer which should have been paid up by the government in this financial year, but will be postponed to the next financial year. The article points out that the government will need Rs 1,45,000 crore to pay up all the subsidies but is likely to sanction only around Rs 22,000 crore. This leaves a gap of Rs 1,23,000 crore which will be postponed to the next financial year, and will become a huge headache for the next government.
This essentially means that the government will not recognise expenditure when it incurs it, but only when it pays for that expenditure. This goes against the basic accounting principles, where an expenditure needs to be recognised during the period it is incurred.
Lets now look at what Chidambaram and the government have done on the government earnings front to boost that number. The government has indulged in massive asset stripping to boost its earnings. A recent estimate in the Mint newspaper suggests that since January 2014, public sector banks have announced interim dividends of Rs 27,474.4 crore.
These are banks in which the government had put in fresh capital of Rs 14,000 crore earlier in the year. So the government gives from one hand and takes away as much twice as more from another. Also, it is worth noting here that the public sector banks are currently on a very weak wicket. As Shekhar Gupta wrote in a recent column in The Indian Express “You read any of the recent data from the RBI, reputed market analysts and brokerages, economists, even from Uday Kotak on CNBC-TV18 this Thursday. You will know that the current stressed, restructured or non-performing loans in the Indian banking system amount to nearly 25 per cent of their total assets. Kotak put the aggregate at Rs 10 lakh crore out of total advances of Rs 40 lakh crore. Scared yet? He says the banks’ total write-offs over the next couple of years could be Rs 3.5-4 lakh crore. The total net worth of all banks now is about Rs 8 lakh crore. In other words, half their net worth will be wiped out.”
In trying to meet the fiscal deficit target, Chidambaram has further weakened the Indian banking system. And then there is the case of moving money from government owned companies to the government. Take the case of the Oil India Ltd and ONGC buying shares in Indian Oil Corporation worth Rs 5,000 crore, a company which is expected to lose a lot of money during the course of this financial year. Hence, no investor other than the government owned companies would have bought IOC stock.
Continuing with asset stripping, the 90% government owned Coal India Ltd, recently declared a record dividend in January of Rs 18,317.5 crore. Of this, the government will get Rs 16,485 crore, given that it owns 90% of the company. The government will also get Rs 3,100 crore, which Coal India will have to pay as dividend distribution tax. This money should actually have been used by Coal India to develop more coal mines so that India does not have to import coal, like it currently does, despite having massive coal reserves. But that of course, hasn’t happened.
The icing on the cake was the sale of telecom spectrum which made the government richer by more than Rs 61,000 crore.
It isn’t a good idea to meet regular expenditure by selling assets. How many people you know survived for long by selling their home, their car and other assets that they owned, to meet their daily expenditure? Ultimately to meet regular expenditure, regular income is needed. The sale of assets to meet current expenditure is not a great practice to follow. This is because assets once sold, cannot be re-sold.
If all these factors highlighted above are taken into account, there is no way the fiscal deficit would have come in at 4.6% of the GDP. The number is at best a joke that Chidambaram and his UPA colleagues have played on the citizens of this country.
The article originally appeared on www.firstpost.com on February 17, 2014.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Indian Oil Corporation
Of fiscal deficit, Manmohan Singh and a prayer to god
Vivek Kaul
India is country that lives on hope, gods and pipedreams. The Prime Minister Manmohan Singh is no different when it comes to this. In a recent interview after taking over as the finance minister of the country he said he was focusing on controlling the fiscal deficit through a series of measures that the officials were working on.
He did not explain what these measures were. But with things as they stand now, it is next to impossible for the government to control the fiscal deficit and the PM can just hope for the best.
Fiscal deficit is the difference between what the government earns and spends. For the financial year 2012-2013 (from April 1, 2012 to March 31, 2013) this number is expected to be at Rs 5,13,590 crore. The government finances the deficit by borrowing money or taking on debt as it is technically referred to as.
There are several reasons why the fiscal deficit is likely to turn out to be higher than the projected number. Let’s start with oil subsidies. Oil subsidies for the year have been budgeted at Rs 43,580crore. The government has more or less run out of this money. It has paid Rs 38,500 crore to oil marketing companies (OMCs) like Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and LPG, at a loss during the last financial year. This payment was made only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for the current financial year.
This leaves only around Rs 5080 crore (Rs 43,580 crore – Rs 38,500crore) with the government for compensating the OMCs for the losses for the remaining part of the year.
International oil prices have come down since the beginning of April. Back then the OMCs were losing around Rs 563crore per day. A recent estimate made at the beginning of July by ICICI Securities puts this loss at Rs 355crore a day. Oil prices have fallen further by around 8% since this estimate was made. Adjusting for that the oil companies continue to lose around Rs 325crore per day or around Rs 10,000 crore per month. Hence the Rs 5080 crore that the government has remaining in its oil subsidy account would be over in a period of 15 days, at the current rate of losses.
Oil prices have fallen by 32% to $85 per barrel since the beginning of April. It’s is unlikely that the price will continue to fall given that at some stage the oil cartel, Organization of Petroleum Exporting Countries (OPEC), will intervene and start cutting production to push up prices. Also, the threat of confrontation between Iran and the United States has been on for a while. Even a whiff of a crisis can push up oil prices. Iran is the second largest producer of oil in OPEC after Saudi Arabia. It has been trying to sell oil in currencies other than the US dollar for the past few years, much to the annoyance of the US.
So if the OMCs continue to lose money at the current rate, the projected losses for the year will be over Rs 120,000 crore. In 2011-2012 the government compensated around 60% of the losses. It got oil producing companies like ONGC and Oil India Ltd to pay the OMCs for the remaining losses. If the same ratio is followed in this financial year as well, it would mean an extra burden of around Rs 72,000 crore for the government (60% of Rs 1,20,000 crore). The fiscal deficit would go up by a similar amount.
Oil subsidies are the not the government’s only problem. On June 14, 2012, the government had approved the minimum support price (MSP) of rice to be increased by 16% from Rs 1250 per quintal from Rs 1080 per quintal. The Food Corporation of India buys rice from the farmers at the MSP. The food subsidy for the current financial year has been set at Rs 75,000 crore. Experts believe that this number is terribly under-provisioned given the various programmes of the government. Also with a significant increase in the MSP of rice the food subsidy is expected to cost the government around Rs 40,000 crore more from its current estimates. Even this number is likely to be beaten because after increasing the MSP of rice significantly, a similar price increase would have to be made for wheat during the coming months.
What does not help is that interest payments on all the money that the government has previously borrowed, comes to Rs 3,19,759 crore. Other than paying interest the government also needs to repay the past debt that is maturing. This amount comes to Rs 1,24,302 crore. Hence the cost of total debt servicing comes to Rs 4,44,061 crore or around 87% of the projected fiscal deficit of Rs 5,13,590 crore for the year. There is nothing that Manmohan Singh and the government can do to control this.
If all these problems were not enough the monsoon till now has been 23% deficient. This impacts the purchasing power of “rural” India and means lower sales of cars, bikes, white goods and fast moving consumer products in rural India, leading to a lower collection of indirect tax for the government. Lower taxes can drive up the fiscal deficit further.
So what is the way out? The subsidy on various oil products needs to be brought down. That’s the only solution that Manmohan Singh led government has to this problem. But the question is will they bite the bullet and make some tough decisions? From the past record it can be safely said, the answer is no. Given these reasons hoping to control the fiscal deficit remains a distant pipe dream.
Hence it’s time for Manmohan Singh to do what most Indians do when they are stretched and stressed. Pray to god. And hope for the best.
(The article originally appeared in the Asian Age/Deccan Chronicle on July 16,2012. http://www.deccanchronicle.com/editorial/dc-comment/fiscal-deficit-and-prayer-god-905)
(Vivek Kaul is a writer and can be reached at [email protected])