How not to contain the fiscal deficit

The government has time and again shown its proficiency in accounting sleight of hand, when it comes to containing the fiscal deficit. It has painted a façade of a healthy fiscal situation, thereby hiding the structural cracks in budgetary and planning processes. Clearly, the next government will have a tough time in bringing down the deficit, a root cause for several of our problems.

While presenting the interim budget 2014-15, the Finance Minister triumphantly declared that he would be able to contain fiscal deficit to 4.6 per cent of the GDP for the current fiscal, bettering the initial estimates of 4.8 per cent. This is being achieved through a massive reduction in the planned expenditure, of around 14 per cent.

The social services sector (excluding rural housing) and the ministry of rural development contribute most to this reduction, with cuts of approximately 15 per cent, and 23 per cent, respectively. Interestingly, this practice is not new. In fiscal 2012-13 too, the budgeted planned expenditure was reduced by around 20 per cent. Again, social services and rural development sacrificed most with reductions of whopping 24 per cent and 30 per cent, respectively. Again, the intention was to contain fiscal deficit to 4.9 per cent of the GDP, lower than the initial target of 5.1 per cent.

This indicates to the practice of over-budgeting of expenditure by the government, with presumably unnecessary expenditure towards social services and rural development being pruned towards the year-end to meet the deficit targets.

There have also been practices of under-budgeting of expenditure by the government in the past. For instance, the total expenditure for fiscal 2008-09 was increased from ₹7,50,884 crore (budgeted) to ₹8,83,956 crore (actuals), an increase of ₹1,33,072 crore, or around 18 per cent. This was on account of additional expenditure for pay revision (₹22,700 crore), food and fertiliser subsidies (₹56,427 crore), allocation to various flagship programmes (₹10,500 crore), among others.

What compelled the government to not budget for such expenditures initially, but eventually provide for them at the year end? The answer lies in the government’s obsession with the fiscal deficit figure. The under-budgeted expenditure resulted in an estimated fiscal deficit of 2.5 per cent of GDP, well within the comfort zone. However, the unavoidable populist expenditures around the year-end resulted in actual fiscal deficit of 6.21 per cent of GDP.

While variations of 3-5 per cent in the budgeted expenditure could be acceptable, consistent variations of more than 10 per cent (on either side) indicate serious fractures in the budgetary process of the government, and merits questioning of the government’s intention.

When the actual expenditure by the ministry of rural development in the fiscal 2012-13 was only Rs 53,129 crore, why was Rs. 80,194 crore (more than 50 per cent increase) budgeted for the next fiscal? Was the intention to reduce the expenditure later, and claim credit for containing fiscal deficit, by adopting austerity? Further, it is absolutely unconceivable that while preparing the budget for fiscal 2008-09, the government was not able to foresee the mammoth expenditure on account of pay revision, subsidies and flagship programmes (which, being presumed essential, had to be released later).

Was it to demonstrate attempts, rather spurious, to contain fiscal deficit in the budget, and claim credit for it? These are serious allegations to which the government must respond. There is an urgent need for deeper investigation into such creative accounting practices, and a thorough assessment of its priorities.

The government has been ever ready to sacrifice social sector and rural development expenditure, which should be priority for the country, at the altar of fiscal deficit, but shies away from avoiding unproductive populist expenditure on subsidies and pay revisions, even at the cost of overshooting the fiscal deficit target.

A related point is that while there has been a consistent decline in planned expenditure i.e. expenditure allocated under various development plans and schemes, no corresponding decrease has been recorded in non-planned expenditure, which comprises meeting operation and maintenance costs of plans, salaries of staff implementing such plans, and subsidies.

In fact, there has been a consistent increase in the non-plan expenditure of the government. For fiscal 2013-14, the budgeted non-plan expenditure was increased by ₹26,842 crore, and the revised estimates in the interim budget also predicted an increase for the current fiscal.

Another measure adopted by the government over the years to ensure compliance with fiscal deficit targets has been a roll-over of expenditure to the subsequent year. A sum of ₹45,000 crore was rolled over from the last year to this year on account of fuel subsidies. Similarly, ₹35,000 crore on the same account has been rolled over from this year to the next. This is unjustifiable, as it restricts the flexibility of the next government.

Even after adopting all these measures, the fiscal deficit during the April-February period has already crossed 114 per cent of the revised estimates for the full financial year.

The prevailing situation calls for a comprehensive review of government planning and budgetary practices, and the long-term strategy to contain fiscal deficit. A possible start could be establishment of an independent fiscal watchdog for adoption of the ‘balanced budget’ principle.

This government has provided important lessons on how not to contain fiscal deficit, which the next must avoid.

Mehta is the secretary-general and Kulkarni a policy analyst at CUTS International