Finance Minister Palaniappan Chidambaram won almost unanimous acclaim for ‘reining’ in fiscal deficit, as measured in GDP terms, at 5.2 per cent in 2012-13 and 4.8 per cent for 2013-14.
Speaking on the deficit, the Finance Minister said, in para 10 of his speech, that with the acceptance of the Kelkar Committee prescriptions in September 2012, ‘red lines were drawn for the fiscal deficit’ at 5.3 per cent for 2012-13 and 4.8 percent for 2013-14. Raising the curiosity of those who were listening to him he said, “I know there is lot of skepticism. In a little while, I shall tell you how we have fared.”
An hour later, in para 118 of his speech, he recalled his promise not to cross the Kelkar lines and shocked every one by saying, “I have kept my promise” to contain the fiscal deficit for the current year at 5.2 per cent and the estimated fiscal deficit for 2013-14 at 4.8 per cent. The real surprise is not about the deficit for 2013-14, which is only an estimate, whose reliability will face test when actual figures are out next year. It is the disclosure that the fiscal deficit for 2012-13, which is based on reliable figures of revenue, expenditure and GDP, is miraculously low at 5.2 per cent -- when everyone was expecting it to be higher -- that surprised all.
How did this miracle happen, particularly in the last few months of 2012-13? By higher GDP? Or, by windfall tax revenues? Obviously neither.
The GDP for 2012-13 is lower than estimated last year by Rs 1.32 lakh crore and revenues were less by Rs 57,000cr than projected in the Budget. The clue to the lower deficit is therefore to be found in reduced spending by a huge Rs 60,000cr [net]. This explains the arithmetic of the lower fiscal deficit, but not the whole story. It does not need a seer to say that this huge spending fall could not be spontaneous and it could not have happened without the Finance Minister wielding scissors and deliberately cutting the spending.
But what kind of spending was cut? The answer to this question will unravel the real character of the fiscal discipline achieved by the Finance Minister. But the true story, though withheld by the Finance Minister in his speech, was the subject of a trailer to the Budget. A month before the Budget [January 31, 2013] a news report said, “Finance Minister P Chidambaram is putting Welfare, Defence and Road projects on the chopping block in a last-ditch attempt” to achieve a lower fiscal deficit target, risking short-term economic growth and angering Cabinet colleagues.”
The report cited three finance ministry officials telling Reuters that the cuts would reduce spending by about Rs 1.1 lakh crore equal to some eight percent of the budgeted outlay, and reduce deficit by one per cent of the estimated GDP.
“It is the first time the scale of the cuts and details of where the axe will fall have been made public, with officials revealing startling details about delays to arms purchases and belt-tightening for politically sensitive rural welfare schemes in an election year,” the report said. But, why tell Reuters, a global news agency? The report explains why.
“Chidambaram has staked his reputation” on lowering the deficit to 5.3 per cent following ratings agency threats to downgrade to junk India’s sovereign debt if action was not taken.”
Though the fiscal discipline story was no secret its grave details and implications still remain unravelled. A critical study of the Budget papers lifts the veil over the true story. The difference between the budgeted and revised spending estimates for 2012-13 reflected the spending cuts mentioned in the news report.
The non-plan expenditure for 2012-13 had actually overshot the Budget estimates by Rs 32,000cr -- being the net of Rs 54,000cr overrun on revenue account and cuts of Rs 22,000cr on capital account. With the non-plan spending uncontrolled, the only alternative was to cut the development spending. But, besides to reduce the deficit, the cuts had to be much more, to recover the overspending on non-plan -- read non-development -- account of Rs 32,000cr. So the Finance Minister has cut the plan spending -- read development spending -- by Rs 92,000cr. The non-development expenditure has actually risen by Rs 73,000cr on account of subsidies of Rs 68,000cr, on petroleum [Rs 53,000cr], food [Rs 10,000cr] and fertiliser [Rs 5,000cr], forcing the Finance Minister to effect cuts in Defence [`15,000cr] Capital Outlay [Rs 16,000cr]; Grants to States [Rs 6,000 cr] and other items [Rs 5,000cr] to bring down the overrun on non-development account to Rs 32,000cr.
The cut in the development spending by Rs 92,000cr was partly used to set off the overrun of Rs 32,000cr in non-development spending and to bring down the deficit by Rs 60,000cr. The Budget papers admit this truth. The Expenditure Budget Vol I [2013-14] admits cuts in development spending for Agriculture, Atomic Energy, Chemicals and Fertilisers, Communications, Drinking Water and Sanitation, Health and Family Welfare, Human Resource Development, Minority Affairs, Power, Road Transport and Highways, Rural Development, Space, Textiles, Urban Development and Women and Child Development. It also discloses cuts in development capex spending on assistance to states, accelerated irrigation benefit programme, backward regions grant fund, urban renewal spending, and agricultural development spending. The climax of the story -- namely grave extent of the head-wise cuts in development spending -- is unveiled in Statement 13 of the Expenditure Budget, which discloses the shocking details of head-wise cuts in Budgetary allocations [2012-13] for development: Irrigation, by 66 per cent [` 847cr]; Energy, by 43 percent [Rs 5,480cr]; Atomic Energy, by 59 per cent [Rs 974cr]; Village and Small Industries, by 36 per cent [Rs 2,090cr] ; Fertiliser industry, by 94 per cent [Rs 151cr]; Roads and Bridges, by 45 per cent [Rs 19,419cr]; Postal and other communication, by 53 per cent [Rs 2,615cr]; Housing, by 19.6 per cent [Rs 2,034cr]; Urban Development, by 18.5 percent [Rs 1,332cr]; Welfare of weaker sections, by 16 per cent [Rs 1,450cr]; Labour/Employment, by 15.2 per cent [Rs 337cr]; Social Security and Welfare, by 14.3 per cent [Rs 2,595cr]; Nutrition, by 71 per cent [Rs 166cr]; Science and Technology, by 27 per cent [Rs 4,472cr]; NE Area allocation, by 18.5 per cent [Rs 5,165cr]; Education, by 9 percent [Rs 5,931cr]; Water Supply, by 6.5 per cent [Rs 825cr].
By these cuts, the spending in 2012-13 on most these heads is far less than the actual amounts spent on each of them in the previous year [2011-12]. In some cases like Roads and Bridges the actual amount spent in 2011-12 [` 40,142cr] was 66 per cent more than the amount [`24,155cr] spent [after cuts] in 2012-13. So, when the Finance Minister proudly claimed to have achieved lower fiscal deficit of 5.2 per cent for 2012-13 he did not tell that his achievement had robbed the nation of development spending by Rs 92,000cr. Had he not cut development spending by almost 18 per cent, the fiscal deficit for 2012-13 would not be 5.2 per cent as he had proudly said, but 6.1 per cent -- 0.8 percent over Kelkar redline. This is the true story of how the Finance Minister has kept his promise of fiscal discipline -- a fiscal discipline drama that smuggled in and set off the fiscal indiscipline of Rs 68,000cr extra non-development spending into the development spending cut of `92,000cr and totally suppressed the true story in the Budget speech.
S Gurumurthy is a well-known commentator on political
and economic issues.
E-mail: comment@gurumurthy.net