Faulty accounting may help FM meet budget goals

By R Jagannathan

If P Chidambaram finally does meet his targeted fiscal deficit target of 5.3 percent of GDP in 2012-13, he can thank a faulty system of government accounting for it. The reforms introduced by the government have nothing to do with it.

If they were, his Chief Economic Advisor Raghuram Rajan would not be asking for “more painful steps” to contain the deficit. The Economic Times quotes Rajan as saying that the cap on LPG cylinders and the small diesel price hike isn’t enough pain. “We are moving in the right direction. Yes, (but) more needs to be done to bring it (subsidy) below 2 percent (of GDP)… We have done something. Obviously we need to do more,”

[caption id=“attachment_567743” align=“alignleft” width=“380”]  Reuters[/caption]

If no major “painful” decisions are forthcoming, one reason for it will be the outdated cash-based system of accounting which will allow him to get away with it.

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At the heart of India’s bad accounting system is the treatment of revenues and expenditures on a “cash” basis-which means if money is not in the bank account or not spent for the purposes it was earmarked, the accounts do not reflect the real picture.

For example, if money payable as subsidies in 2011-12 is actually paid out on 1 April 2012 instead of 31 March 2012, the 2011-12 budget deficit will look smaller. As for the next year’s budget, one can always put a small deficit figure and let the year decide where the actual numbers will go.

This is what Pranab Mukherjee did in the March budget, where he rolled over the balance subsidy payments due to oil companies for 2011-12 to this year, but failed to provide enough money even in this year’s budget. He provided around Rs 43,500 crore for oil subsidies this year, but almost all of it went to pay last year’s subsidies. This year’s kitty for oil subsidies started with zero.

This year, though, Chidambaram has other things working for him. While the subsidy bill is not going to disappear - it can be rolled over to next year at best-most government departments are failing to spend the money allotted to their schemes and projects.

Net result: there will be a huge saving on expenses, even though projects will remain incomplete, and costs may escalate due to this delay in spending.

The upside is that his budget deficit will look smaller.

Business Standard reports that a quarter of over 100 spending departments had not spent even a third of the money allocated to them for 2012-13 till October. And since ministries are allowed to spend only 33 percent of a year’s total outlay in the last three months, these ministries will not end up spending their full allocations this year.

The newspaper says these ministries include atomic energy, pharmaceuticals, posts, consumer affairs, corporate affairs, power, steel and water resources. “In the case of most of these departments/ministries, it is unlikely that their plan expenditure in November and December would be more than what they have spent during April-October.”

When ministries don’t spend what they are entitled to, the result is delayed projects, whose costs can then rise, and lower corporate incomes, since what the government spends goes to generating incomes for businesses that sell to government. In short, reducing the fiscal deficit by not spending allocations means helping the economy slow down further.

Says Vishal Bansal of Ernst & Young in BusinessLine: “Policymakers have realised that reliance on cash-based accounting makes it harder to resolve complex financial challenges. In particular, cash basis does not provide a complete picture of the government’s liabilities, assets, cost of holding assets and their consumption. Also, it gives room for financial opportunism, and results may be changed by collecting advance taxes and/or delaying payment of expenses. The problem is compounded by a lack of disclosures in the financial report.”

The government is not only delaying expenses, but also taking its time making refunds to taxpayers. According to Chidambaram, this year refunds have totalled Rs 57,000 crore till mid-December against last year’s Rs 70,000 crore. One reason is the government’s decision to give priority to taxpayers who are owed loose change rather than big sums. He said: “Somebody who has to get Rs 5 lakh can wait. Somebody who has to get Rs 5,000 should get first,” the minister said.

It is an equitable principle, but if not all the big refunds are paid quickly, the government benefits in two ways by accounting for it on a cash basis: the refund value does not account for the time value of the money, and the money owed may get shifted to the future, or even next year.

Isn’t it time the government stopped playing such accounting games to get the deficit in order?