Budget 2014: 8 tricks Chidu may use to show you right numbers

Vote-on-Account 2014-15 will, thankfully, not be a long-drawn affair. Since an outgoing government can’t announce too many new taxes or concessions before an election, the finance minister’s speech will be largely political. Finance Minister P Chidambaram will have his last opportunity for grandstanding today. His vote-on-account, being a budget without any major new proposals, will be important only for one reason: it will tell us how honest the finance minister has been in showing a true and fair picture of the state of the government’s finances. Right now it’s bad, bad. On past track record, the chances are Chidambaram will outdo himself this time on account fudging. He will use one, or all, of the eight tricks indicated below to claim the numbers presented are the real thing. A red herring will be the fiscal deficit figure – which Chidambaram has been shouting from the rooftops about. He has repeatedly said he has drawn a “red line” under the deficit at 4.8 percent. However, this figure will be partly fictitious, since it may include revenues brought forward from next year, and expenses incurred this year but handed over to the next finance minister. According to a recent report last week in Business Standard, the next finance minister, who will have to present the real 2014-15 budget in July after the elections, will inherit unpaid bills of around Rs  1,23,000 on account of food, fertiliser and fuel subsidies pertaining to the previous year. This means Chidambaram has left behind an amount that will be more than 1 percent of GDP to be paid by his successor. So, even if he says fiscal deficit is 4.8 percent (he may claim it’s even lower, thanks to an unexpected spectrum auction bonanza), the actual figure will be at least one percent higher. The real devil will be in the detail. It is only when you look under the rug that you will find the bug. In the weeks after the vote-on-account, economists will turn the vote-on-account rug over to figure out where the accounting bugs are. [caption id=“attachment_1393223” align=“alignleft” width=“380”]  Chidambaram could use one or all of eight budgeting tricks: PTI[/caption] But we need not be unduly harsh only on Chidambaram, though he has been a major exponent of accounting fudges. All finance ministers do some accounting jugglery. One reason why this is possible is because, unlike company managements, finance ministers can make forward-looking statements and present a rosy picture on revenues and expenditures – when they actually may not have any clue on how the next year is going to shape up. In essence, most finance ministers can project anything and there is at least some chance (usually, one in 10) that they are right. But there is more of a chance that they are wrong. For those who would like to check under Chidambaram’s vote-on-account rug, here is a check-list of how FMs can fudge their books and make their budgets look better than they are in terms of fiscal deficit, revenue growth, subsidies, etc. First, any deficit number is a function of both the numerator and the denominator. The fiscal deficit figure of 4.8 percent of GDP that Chidambaram has promised to meet will be met by tinkering with the numerator: cutting unspent expenditure. The reason why the ministry has been miffed with low GDP estimates is that it now has to work with a smaller denominator. It’s tougher to fudge what has already happened. However, at the stage of projecting the next year’s deficit number, the FM has wider options, since both the numerator and denominator are unknown. To project a lower deficit, he can presume a higher GDP number or lower subsidies or whatever. Second, inflation can be a big help. If inflation artificially inflates the GDP number, it helps increase the denominator (the GDP). Inflation also pushes people into higher tax brackets and increases tax revenues. A higher GDP assumption enables the FM to project increased revenue collection, which helps shrink the deficit. At the start of the year, no one can challenge these assumptions. Third, there are ways to hide expenses. The classic case is the oil subsidy. Till Pranab Mukherjee became FM, oil subsidies were paid by giving oil companies bonds of an equivalent amount. These bonds bloated the government’s debt, but did not show up on the expenditure side of the budget. Hence, a fictitious lower subsidy bill and deficit. Fourth, expenses can be shifted to someone else’s books, too. Once again, the oil exploration companies are the best examples. The finance ministry does not bear the full extent of the subsidy on fuel even today, after years of fudge; it is shared upto 40 percent by the likes of ONGC, Oil India and Gail. The exchequer’s oil subsidy bill is thus only 60 percent of the real figure. Fifth, expenses can be shifted to the next year. As we have noted earlier, this is what Chidambaram is most likely to do in his budget since he has to cut the fiscal deficit. He can underprovide for all kinds of subsidies and tell parliament that he will provide more if needed. The government may actually spend more as election approaches, but by then the focus will not be on the budget deficit, but the seat deficit. Sixth, optimistic assumptions about the value of the rupee or crude oil can help. If crude oil or imported fertiliser prices are assumed to be 10-15 percent less over the next year, either because of an expected strengthening of the rupee or lower global prices, the subsidy bill will automatically be lower. Seventh, FMs can lean on public sector companies to bail them out. In the 2012-13 budget, Pranab Mukherjee showed higher earnings from selling ONGC shares, but this came largely from LIC’s pockets. The fiscal deficit was thus financed by arm-twisting LIC to buy shares. This is not to say LIC wouldn’t have bought the shares anyway, but the FM was helped by LIC’s purchases to show a lower deficit. But what has effectively happened is that money has been transferred money from one pocket of government to another. A related method is to force public sector companies to fork out more dividends. Chidambaram has employed both tools: this year a lot of the disinvestment proceeds and bank recapitalisation costs are being paid for by LIC, and cash-rich PSUs like Coal India have been asked to fork out fat interim dividends – of which government’s take, including dividend tax, will add up to more than Rs 19,500 crore. Remember, these dividends are due only next year, but Chidambaram has already collected the cash. Eighth, and this is the neatest and easiest trick. Even after giving away concessions, FMs can claim that their revenues will not fall (or even rise) since they plan to improve “tax compliance”. That is, catch more tax evaders or get more people to pay. Finance ministers may have even more tricks up their sleeves, but these are some of the ones most frequently used. So don’t be fooled by any number Chidambaram throws at you in the vote-on-account budget.