Budget Analysis: Chidu has just used the bikini formula on you

So let me start this one with a clich. Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital. Navjot Singh Sidhu did not say that. Aaron Levenstein, an American professor of business administration did.

The finance minister P Chidambaram, has managed to use the bikini formula on the fiscal deficit number of the budget. Fiscal deficit is the difference between what a government earns and what it spends.

The fiscal deficit number that Chidambaram and his team have come up with is as Levenstein said is suggestive, but what it conceals is vital. The fiscal deficit for the year 2012-2013 (the period between 1 April 2012 and March 2013) is likely to stand at Rs 5,20,925 crore or 5.2% of the GDP.

When Pranab Mukherjee had presented the budget last year this number had been projected at Rs 5,13,590 crore or 5.1% of the gross domestic product.

Oil subsidies are an important part of the expenditure of the government. The number at the beginning of the year had been assumed to be at Rs 43,580 crore. The oil marketing companies sell cooking gas, diesel and kerosene at a loss, and are compensated by the government for these losses. This adds to the overall expenditure of the government and thus to the fiscal deficit.

PTI

PTI

So what is interesting is that in the budget presented today the oil subsidy number has been revised to Rs 96, 880 crore. This more than double the number that had been assumed at the beginning of the year. But this does not take into account the total losses or under-recoveries incurred by the oil marketing companies.

As Chapter 3 of the Economic Survey released yesterday points out "The Indian basket crude oil was $107.52 per bbl (April-December) in 2012 and even with the pass through effected in the course of the year, under-recoveries of OMCs surged and were estimated at Rs1,24,854 crore during April-December 2012-13."

So the under-recoveries on account of selling cooking gas, diesel and kerosene at a loss stood at Rs 1,24,854 crore for the first nine months of the financial year. If we do a simple mathematical projection this number for the financial year 2012-2013 should be Rs 1,66,107.7 crore ((12/9) x Rs 1,24,854 crore).

While this may be a slightly simplistic way to operate but what it reveals is vital. Also let me make another assumption to make this calculation a little more robust. Since January the oil marketing companies have been allowed to raise prices of diesel on a slow but regular basis. The number of cooking gas cylinders that can be taken in a given year at a subsidised rate has also been limited to nine. So lets further assume that all this helps and the under-recoveries of oil marketing companies for the financial year 2012-2013 will turn up around Rs 1,55,000 crore.

The oil subsidies when the last budget was presented had been assumed to be at Rs 43,580 crore. The budget presented today has revised this number to Rs 96,880 crore. But even that is not enough to make do for the losses that have been incurred by the oil marketing companies and who need to be compensated for the by the government.

So there is a gap of around Rs 60,000 crore. The question here is that how will oil marketing companies be compensated for their under-recoveries if no provision is made for it in the budget? The simple answer is that they will be compensated for the under-recoveries from the next year's budget i.e. the budget for the financial year 2013-2014 (the period between 1 April 2013 and 31 March 2014). Or the finance minister will get companies like ONGC and Oil India Ltd, which produce oil to pay for the difference.

Now how do the oil subsidies for next year look? The oil subsidies for the year 2013-2014 have been assumed to be at Rs 65,000 crore. It need not be said that oil marketing companies will face under-recoveries in the next financial year. These under-recoveries might be lower given that diesel prices are being gradually raised and all cooking gas is no longer subsidised. But there will be under-recoveries none the less. Given that the under-recoveries this year were at Rs 1,50,000 crore, even with higher diesel prices and limited subsidised cooking gas cylinders, the oil subsidy number is likely to be more than Rs 65,000 crore.

Hence, the fiscal deficit for the next financial year has also been understated to that extent. While some sort of accounting jugglery is expected in the budget this is getting a rather too blatant. ONCG and Oil India Ltd will have to come to the rescue of the oil marketing companies and the government again. It need not be said that this is not prudent accounting at all.

What is interesting is that this is a tactic that the Congress led United Progressive Alliance has constantly adopted (as can be seen from the accompanying tables). The budgeted subsidies are substantially lesser than the actual number. This tends to underdeclare fiscal deficit at the beginning of the year.

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Other subsidies on fertilizer and food have also been regularly underestimated by a large amount as can be seen from the following tables.

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What these tables clearly tell us is that subsidies are underestimated almost every year and sometimes by huge margins. For the year 2012-2013 subsidies were expected to be at Rs 190015.13 crore. The revised estimate has come in at Rs 257654.43 crore, which is almost 36% higher. This makes it very difficult to believe the next year's subsidy target of Rs 231083.52 crore especially when more subsidies/sops are likely to be announced during the course of the next financial year in lieu of the 2014 Lok Sabha elections. If the government does meet this target then it will have to cut on other planned spending, like it has done this year. And that can't be good for the Indian economy.

Given this the fiscal deficit target of 4.8% of GDP or Rs 5,42,499 crore, for the next financial year is unlikely to be met.

Vivek Kaul is a writer. He tweets at @kaul_vivek