Mr Kelkar, both Pranab and Chidu have been cooking the books

How do the budget numbers get decided? Take your pick from the following:

1. Finance ministry officials draw chits with numbers written on them from a bowl. They pick one chit to decide the fiscal deficit, another for subsidies, etc.

2. Ministry officials throw darts at a wallboard, and the one closest to bull-eye gets to write the final budget numbers according to his whims.

3. The boss (i.e. the FM) tells his mandarins what numbers are acceptable, and all other budget totals are reworked to make sure they add up. Reconciling the numbers with reality is not mandatory.

The right answer may be (3), but Vijay Kelkar, who heads the panel on fiscal consolidation, can be forgiven if he thinks even the first two look plausible.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

[caption id=“attachment_470756” align=“alignleft” width=“380”]  In 2012-13, which is already half over, Kelkar says that the subsidy and revenue estimates may be off by a huge, huge margin. According to his calculations, the subsidy estimates may be Rs 70,000 crore off target, and revenue expectations by Rs 60,000 crore.[/caption]

According to a report in Business Standard yesterday, Kelkar was left scratching his head about how the finance ministry could have got its budget numbers so wrong. Does the ministry not have enough numerate officials?

In 2012-13, which is already half over, Kelkar says that the subsidy and revenue estimates may be off by a huge, huge margin. According to his calculations, the subsidy estimates may be Rs 70,000 crore off target, and revenue expectations by Rs 60,000 crore.

That’s a Rs 1,30,000 crore miss.

But we have news for you, Mr Kelkar. The real gap may be even bigger - closer to Rs 2,00,000 crore, and the reason why it is not visible even to you is because some of the subsidies are hidden in the folds of the ONGC’s, Gail’s and Oil India’s profits.

Last year, of the total subsidy bill of Rs 1,38,500 crore, the government paid out only Rs 83,500 crore. The balance - around Rs 55,000 crore, or nearly 40 percent - came from these three oil and gas producers.

The subsidy bill that the government forces the oil and gas producers to share at gunpoint has the net effect of understating the real fiscal deficit.

This year, assuming ONGC, Gail and Oil India have to share the same 40 percent of the subsidy bill of around Rs 1,65,000 crore (after the diesel hike) that is expected, it’s another Rs 66,000 crore blow to them.

If the subsidy bill is understated by Rs 66,000 crore due to this subterfuge, the effective target miss will be closer to Rs 1,96,000 crore, or even Rs 2,00,000 crore.

The Economic Times estimates the fiscal deficit, taking Kelkar’s figure of a Rs 1,30,000 crore shortfall, at 6.33 percent. (The budget’s fiscal deficit estimate is Rs 5,13,590 crore).

If we add the subsidies hidden in the oil and gas companies’ balance-sheets, we get a final subsidy figure in excess of Rs 7,09,590 crore (Rs 5,13,590 crore + Rs 1,96,000 crore underestimate) on an estimated GDP growth of Rs 10,159,884 crore in 2012-13. That’s 7 percent fiscal deficit - compared to the 5.1 percent assumed in the budget.

Since growth is likely to be far lower than the 7.6 percent assumed in the budget, the final figure will be more than 7 percent, unless drastic cuts happen in spending or there is an unexpected windfall on disinvestment receipts or spectrum auctions.

If Kelkar were to delve deeper into why the finance ministry is so mathematically challenged, he will find both P Chidambaram and Pranab Mukherjee were indulging in a lot of financial jugglery.

Chidambaram issued oil bonds to compensate oil companies for their subsidies, and this kept subsidies off his books. (Bonds are dents, not cash outgo). In 2007-08, Chidambaram issued bonds worth Rs 20,000 crore and next year this bloated to nearly Rs 1,00,000 crore as Lehman Brothers collapsed and Pranab Mukherjee collected the debris on his budget watch.

Mukherjee decided to end Chidambaram’s accounting fiction by bringing subsidies back to the budget, but he did his own bit of legerdemain by shifting more of the subsidies to the oil and gas producers (their share went up from 33 percent to nearly 40 percent), and underestimating the actual amount of subsidies.

Clearly, both Chidambaram and Mukherjee have cooked the books. It is not a simple case of a mathematically-challenged finance ministry.

(To read more about how Chidambaram and Mukherjee cooked their books, click here )