Whether Budget Numbers Add Up Will Depend On Execution But FM Deserves One Out Of Three Cheers For Transparency

Union Finance Minister Nirmala Sitharaman presented her second budget on 1 February and like her previous one, this too seems to have disappointed the majority of both the markets and the commentariat. Some analysts have raised questions, particularly, on the three ambitious targets set by Sitharaman.

First, the disinvestment target of Rs 2.1 trillion for FY 2020-2021. In the past eight years, the government has achieved its target only twice. Since 1991, the Centre has missed its target 18 times.

Sitharaman announced disinvestment worth Rs 1.05 trillion in her last budget but would fall short of it by Rs 40,000 crore (assuming that in the next two months, the real disinvestment goes from current Rs 18,000 crore to Rs 65,000 crore).

So, the sceptics are on the right side of history but what gives optimists hope is that a lot of disinvestment that is currently underway will spill over into the next fiscal. Out of Rs 2.1 trillion, the government is planning to rake in Rs 90,000 crore from disinvestment of government stake in public sector banks and financial institutions, which can be easily met if even a small chunk of proposed LIC stake sale goes through.

This leaves only Rs 1.2 trillion, which is only slightly higher than last year’s budgeted target of Rs 1.05 trillion. Given that Air India and BPCL disinvestment is underway, these two will go a long way in achieving the target. In any case, more than the number, what would matter is the implementation. Arun Jaitley did manage to meet his disinvestment targets two years in a row. Sitharaman can achieve it too.

Second, some are not taking the tax collection growth estimate of 14 per cent at face value in light of the new alternative tax structure which Sitharaman predicts will cause a loss of Rs 40,000 crore to the exchequer. However, it is unlikely that a substantial chunk of taxpayers will shift to the new regime as those with good amount of exemptions are likely to be net losers under it.

Therefore, the assumed loss isn’t realistic. As far as whether 14 per cent growth can be achieved or not is a genuine concern. Last year, the government budgeted for 18 per cent rise in direct tax collections amounting to Rs 13.35 lakh crore but has revised it now to Rs 11.80 lakh crore which is significant.

This is mainly because of the growth slowdown, which was more than the ministry mandarins had expected. The FM is taking nominal growth to be 10 per cent in 2020-21, which though seem liberal assumption, it is achievable if real growth increases to 5.5-6 per cent (very doable) and inflation remains around 4-4.5 per cent.

The government is perhaps expecting an increase in DDT collections as the dividend, which was earlier taxed at companies, has been shifted to recipients who are in 30 per cent + tax bracket. But substantial windfall from this seems unlikely as we may see an overall reduction in dividends distributed, which will mean less revenue in taxes at worst or not much difference from last year at best.

In fact, in the remaining year, companies may boost dividend to avoid next year's taxation in hands of big equity owners and promoters which in turn may boost this year’s deficit. In any case, the revenue shortfall, if it happens on the account of direct tax collections, won’t be a significant one to cause much of a heartburn for the government.

Third, the Finance Minister has set a fiscal deficit target of 3.5 per cent for 2020-2021. These targets have been a joke. The UPA government in general and Finance Minister P Chidambaram in particular changed these targets with impunity as he saw fit per his convenience.

Under Arun Jaitley, some discipline was restored, which seems to have slackened now. The difference is, Chidambaram expanded the deficit when he shouldn’t have, and Jaitley kept cutting it when the economy was slowing down.

The deficit relaxation was the need of the hour, but finance ministers have made a habit of overpromising and under delivering in this regard. In her last budget, Sitharaman set an ambitious target of 3.3 per cent fiscal deficit. Now, it has been revised to 3.8 per cent.

Of course, this depends on whether the disinvestment, which stands at Rs 18,000 crore right now, will increase to Rs 65,000 crore in the next two months, and if the government actually succeeds in meeting its tax collection targets. The actual number could be around 4 per cent. Again, it’s all about implementation rather than setting the ambitious targets.

But all this is only a part of the problem. Actual fiscal deficit is over 4.5 per cent already, but FM after FM have hidden these numbers under extra-budget borrowings.

Chidambaram mastered this art and used this way to the hilt to hide actual deficits. The practice was continued by Jaitley, and Sitharaman is doing the same. For instance, food subsidy bill for 2019-20 is Rs 1.84 trillion. However, in the expenditure, only Rs 1.08 trillion is shown. This means that it reduces the deficit by Rs 75,500 crore on paper.

But in reality, it’s hidden under extra budget borrowings and is financed via National Small Savings Fund. In 2020-21, the government will be meeting its expenses worth Rs 1.36 trillion via NSSF. It won’t show up in expenditure on paper. What Sitharaman deserves credit for is for publishing these numbers as part of the budget document for the first time. She must be applauded for this honesty, which was missing so far, but this is not the full story.

Another trick the FMs use to hide deficits is to bring forward the revenues from the next fiscal and delay expenditure to show less deficit. This cooking of books is facilitated by a flawed cash accounting system we use for budgets under which the government conveniently lists non-accrued revenues as this year's income, while postponing this year's real expenditure to next year’s books. And on and on it goes. Sitharaman has done the right thing, but she needs to go the whole way in correcting these anomalies.

India’s budget numbers don’t add up precisely because of all these issues. In a race to present an ‘all is well’ picture, all sorts of tricks are employed to window dress the real situation. This leads to situations where we witness huge gaps in budget and revised estimates year after year.

In 2018-19, the government overestimated its tax revenues by Rs 1.45 trillion and disinvestment revenues by Rs 40,000 crore, while it underestimated its expenditure by over Rs 70,000 crore. That’s more than a Rs 2.56-trillion difference. That translated to more than 4.6 per cent fiscal deficit. But since the government had wrongly estimated 3.3 per cent as its deficit target and it could only stretch it to 3.8 per cent legally (0.5 per cent relaxation is allowed), the rest 0.8 per cent had to be hidden cleverly using accounting tricks elaborated above.

So, FM Sitharaman deserves one cheer for transparency, but for all three cheers, she needs to junk the cash accounting and start showing true deficit numbers rather than hiding them under off budget borrowings.