Some chartered accountants who attest corporate accounts bear uncomplimentary reputation for fudging accounts as the last resort to balance the books.* The last resort of such chartered accountants seem to have become the first option of finance ministers. Look at the way the numbers have been fudged and other financial landmines have been concealed in Budget 2013-14 and the Interim Budget for 2014-15. Take the fiscal deficit figures for 2013-14. Former finance minister P Chidambaram has taken credit for containing the deficit at 4.6 per cent of the GDP. It is crude fudging. Chartered accountants are definitely more subtle. Chidambaram has fudged the deficit for 2013-14 on three counts. One, he got the banks to deposit the tax deducted at source payable after 31.3.2014 in advance, to include it as his collection in 2013-14, thus stealing a revenue of Rs 20,000 crore which his successor Arun Jaitley would have collected. Two, short fall of Rs 15,000 crore in the revenues in the Revised Estimate given by Chidambaram for 2013-14 has been kept in wraps. Third, the petroleum subsidy has been short provided by Rs 10,000 crore in 2014-15–Jaitley has to fund this in his Budget. These three items will push the fiscal deficit for 2013-14 from 4.6 per cent to 5 per cent. This is the beginning, not the end, of the story.
Stopping development to cut deficit
The Fiscal Policy Strategy Statement attached to the 2014-15 Budget says the actual fiscal deficit had reached 94 per cent of the budgeted deficit in November 2013 itself, but it was maintained at the same level till March 2014–meaning that, in the last four months to March 2014, the deficit was very little. How did Chidambaram achieve this miracle? By “austerity measures”, non-plan spend was cut by 10 per cent and plan expenditure was “rationalised” –says the Strategy Statement. True? The story of a cut in non-plan spending is a half-truth–it finally vaulted over the budgeted figure by Rs 6,000 cr. It is the plan spending–read development spending–that has been cut by Rs 80,000 crore. Had the development spend been as budgeted, the deficit would have vaulted by further 0.7 per cent to 5.7 per cent. See the irony. Chidambaram proudly raised his voice to announce a 34 per cent [Rs 1.41 lakh crore] rise in development spend in his Budget speech in February 2013 and got encomiums. In February 2014, he announced a cut back of the very same spend by 58 per cent and got credit for reducing the fiscal deficit! There is not even a remote sense of remorse for cutting two-fifths of the development spend.
Fudging 2014-15 accounts
Now come to the Interim Budget for 2014-15. By stealing revenues of Rs 20,000 and short providing petroleum subsidy of Rs 10,000 crore, Chidambaram has already caused a Rs 30,000-crore hole in the final Budget that Jaitley will present. See further. Chidambaram has claimed to have fixed the fiscal deficit for 2014-15 at 4.1 per cent–a parting lie that again won for him the credit for lowering the deficit! Besides, he has concealed many financial landmines which can booby-trap Jaitley’s Budget. And also the nation’s economy, unless detected and addressed in time. Chidambaram has projected the nominal GDP growth at 13.4 per cent but a higher revenue rise at 19.2 per cent for 2014-15. How could revenues rise more than growth? Economists call the extra revenue over growth the buoyancy ratio. The buoyancy ratio assumed by Chidambaram for 2014-15 is 43 per cent over the GDP growth. For 2013-14, he had projected a nominal GDP growth rate of 13.4 per cent and got a lower revenue rise of 13 per cent rise– that is negative buoyancy ratio. That the projected buoyancy of 43 per cent for 2013-14 is just a mirage is corroborated by the budgeted rise of customs revenue by 15 per cent in 2014-15 against just 6 per cent in 2013-14–one and half times the rise in 2013-14. Similarly, Chidambaram projects excise to rise by 11.7 per cent in 2014-15 against 1.6 per cent in 2013-14–by more than seven times the previous year’s rise. If the revenues rise in 2014-15 is like 2013-14 only, the deficit will be higher by Rs 48,000 cr. More. Chidambaram had projected disinvestment receipts of Rs 54,000 crore in 2013-14, but ended up with `19,000 crore. Still he has projected a disinvestment income of Rs 52,000 cr for 2014-15. Here too if the 2013-14 numbers are repeated, the deficit will go up by Rs 33,000 crore. Again, Chidambaram has estimated non-plan spending to rise by some 8 per cent in 2014-15 but it had risen by some 17 per cent in 2013-14. Increase in interest outgo and normal rise in salaries alone would exhaust the rise in non-plan expenditure projected. If the non-plan spend rises in 2014-15, like in the previous year, the deficit would be up by Rs 1 lakh crore. Also, Chidambaram’s Budget does not recognise the Pay Commission arrears of Rs 40,000 crore for which a bill is waiting to be presented to Parliament. This will add Rs 40,000 crore to non-plan expenditure each year in 2017-18 and 2018-19. These add up to Rs 1,81 lakh crore to the deficit over Chidambaram’s number. Jaitley has to handle this in 2015-15 and later. This is besides the transfer of the deficit of `30,000 crore from Chidambaram’s 2013-14 account to Jaitley’s 2014-15 account.
Information hidden in different places in the government discloses further financial landmine. As the plan spend till now is very poor, the plan spend for 2015-16 and 2016-17 is projected to rise by 20 per cent. But even with such increased allocation, Gross Budgetary Support for the 12th Plan will be only Rs 29.10 lakh crore. It will be short by Rs 6.58 lakh crore against Rs 35.68 lakh crore reckoned in the 12th Plan. It is clearly bound to affect growth. On the revenue side, even assuming that the General Sales Tax and Direct Tax Code become operative in 2015-2016 and up the GDP by 1 per cent and consequent rise in revenue, still the final resource gap will remain negative until 2016-17. To manage this gap, Tax-GDP ratio has been revised to 11.25 per cent from the projected 10.72 per cent in 2015-16, to 12 per cent from 11.20 per cent in 2016-17, to 13 per cent from 11.79 per cent in 2017-18 and to 14 per cent from 12.52 per cent in 2018-19. The revisions are just statistical hope. Yet, these hidden landmines can blast the economy out of control. And more. By transferring centrally-sponsored schemes to states in 2014-15 – resulting in a further transfer of Rs 1.19 lakh crore to states–Chidambaram has made Jaitley’s job more difficult as that much amount could have been churned by the central government for its new schemes. Here is some more hidden information. The public debt situation is grave. The dreaded debt-trap–where the government will be borrowing to pay only interest–is in sight by 2015-16. Proceeding from where Chidambaram has left the economy, the net government borrowing after repayment of debts will be Rs 4.20 lakh crore in 2016-17, but the interest burden of Rs 5.12 lakh crore for that year will exceed the borrowing by Rs 92,000 crore. This figure is likely to rise further and not go down till 2019-20. If he looks at these numbers, Jaitley will lose sleep. Unless, like diesel price rise, some harsh steps are taken this year and next, the nation may risk downgrade of its credit rating.
What should be done?
The UPA regime had only spent and never attempted to raise revenue for a decade. The result is the present financial mess. If this government has to start undoing the damage, it has to go for innovative, bold and fresh resource mobilisation. First, the annual tax giveaways of Rs 5.50 lakh crore have to be withdrawn, as suggested in the Economic Survey 2013-13. If it is withdrawn by one-fifth this year, it will yield a revenue of Rs 1.10 crore to government. Next there is need to tax the non-delivered forex, financial and equity derivatives. A tax of 10 paise per Rs 100 [at 0.1 per cent] will yield revenues of over `60,000 crore. Economist John Maynard Keynes had suggested this tax to contain speculation. In a paper [July 26, 2000], the Center for Economic and Policy Research noted that in most of the West such tax is levied on equity derivatives and the rate varies between 0.5 per cent and 1.6 per cent. Only in the US, the tax rate is low at 0.004 per cent. Most derivative transactions are speculative. The suggested tax is desirable even to contain volatility in markets. Also, new sources of revenue will emerge. These two measures will yield an additional revenue of Rs 1.70 lakh crore which can handle the financial landmines hidden in the files of government. Unless such bold steps are taken to raise revenues the status quo will continue. And it does not need a seer to say what the financial land mines left by UPA will do to the country.
(*I stopped attesting company accounts as far back as 1979 when corporate accounts were more reliable.)