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Chidambaram has screwed the next govt even before it takes over

What we don't achieve ourselves, we expect from others.

This is a statement I have oft used during family conversations in the context of the "unrealistic" expectations parents and grandparents have from their children and grandchildren.

But it is also true for the current Congress party led United Progressive Alliance (UPA) government.

After spending much more than it earned for close to six years now, and managing to screw up the Indian economy left, right and centre, the Congress-led UPA government wants the government that takes over after the next Lok Sabha elections scheduled later this year, to cut down on the fiscal deficit.

 Chidambaram has screwed the next govt even before it takes over

Union Finance Minister P Chidambaram. Image courtesy PIB

The fiscal deficit target set for the financial year 2014-15 (i.e. the period between April 2014 and March 2015) is at 4.1 percent of the gross domestic product (GDP). Fiscal deficit is essentially the difference between what a government earns and what it spends expressed as a percentage of GDP.

The Congress led UPA government set a fiscal deficit target of Rs 1,33,287 crore or 2.5 percent of the GDP in the financial year 2008-09 (i.e. the period between April 2008 and March 2009). The actual number came in at Rs 3,36,992 crore or 6 percent of the GDP. And so started an era of fiscal profligacy.

The fiscal deficit target set for the financial year 2013-2014 (i.e. the period between April 2013 and March 2014) was set at Rs 5,42,499 crore or 4.8 percent of the GDP. But it is expected to come in at Rs 5,24,539 crore or 4.6 percent of the GDP.

This is primarily a result of accounting shenanigans as explained earlier and does not reflect the true state of the government accounts.

The fiscal deficit target set by the Finance Minister P Chidambaram for the next financial year is at Rs 5,28,631 crore or 4.1% of the GDP. Prima facie, the target is unachievable and there are several reasons for the same.

The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore. In comparison, the petroleum subsidy for 2013-14 has come in at Rs 85,480 crore. This after, Rs 65,000 crore had been allocated towards it, at the beginning of the year.

Even a higher allocation of Rs 85,480 crore is not enough, given that the under-recoveries of the oil marketing companies for the first nine months of the year stand at Rs 1,00,632 crore during the first nine months of 2013-14 (April-December) on the sale of diesel, PDS kerosene and cooking gas.

The interesting bit here is that since 2009-10, the government has never been able to match the petroleum subsidy it allocated originally at the beginning of the year (as can be seen from the following table).

Take the case of 2012-13, when Rs 43,580 crore was allocated towards petroleum subsidy at the beginning of the year. The actual bill came in at close to Rs 96,880 crore, which was more than double. Given this, it is highly unlikely that Rs 63,426.95 crore will turn out to be enough.

This means greater expenditure for the government, and hence, a higher fiscal deficit, unless of course it balances the expenditure by cutting down asset creating planned expenditure. That is not the best strategy to follow, especially in a scenario of low economic growth which currently prevails.

Interestingly, even after making a higher allocation, a portion of subsidy payments is typically postponed to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.

If this expenditure has to be made and assuming that everything else stays equal, the fiscal deficit of the government would shoot to Rs 6,51,631 crore (Rs 5,28,631 crore + Rs 1,23,000 crore) or 5.1% of the GDP, against the currently assumed 4.1% of the GDP.

The only way the next finance minister would be able to meet the fiscal deficit target of 4.1% of the GDP, would be by following Chidambaram's strategy of postponing expenditure, which is not the best way to go about it.

Another interesting point is the allocation of Rs 1,15,000 crore made towards food subsidies. Prima facie this does not seem to be enough to meet the commitments of the Food Security Act.

The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. Andy Mukherjee, a columnist with Reuters, puts the cost at around $25 billion. The Commission for Agricultural Costs and Prices(CACP) of the Ministry of Agriculture in a research paper titled National Food Security Bill – Challenges and Options puts the cost of the food security scheme over a three year period at Rs 6,82,163 crore. During the first year (which 2014-15 more or less is) the cost to the government has been estimated at Rs 2,41,263 crore.

Economist Surjit Bhalla in a column in The Indian Express put the cost of the scheme at Rs 3,14,000 crore or around 3 percent of the gross domestic product (GDP). Ashok Kotwal, Milind Murugkar and Bharat Ramaswami challenge Bhalla’s calculation in a column in The Financial Express and write "the food subsidy bill should…come to around 1.35 percent of GDP".

Even at 1.35 percent of the GDP, the cost of the food security scheme comes in at close to Rs 1,73,000 crore (1.35 percent of Rs 12,839,952 crore that Chidambaram has assumed as the GDP for 2014-2015).

All these numbers are more than the allocation of Rs 1,15,000 crore made by Chidambaram towards food subsidies. This means that there will be trouble for the next government in balancing the budget.

Of course, the new government that takes over after the Lok Sabha elections will present a fresh budget, in which it can junk all the calculations of the current budget (or to put it correctly, the vote of account). But even if the next government does that the expenditure commitments that the Congress-led UPA government has created are so huge, that it will be completely screwed on the finance front, even before it takes over.

Vivek Kaul tweets @kaul_vivek

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Updated Date: Feb 17, 2014 19:59:55 IST