Budget or Fudget?: Read This and Decide

The finance minister Piyush Goyal in a post budget interview said that no number in the budget is fudged. Goyal, has been a chartered account of repute, and would know that when it comes to accounting, and especially government accounting, a change in a few assumptions here and there, can do the trick and achieve the desired result. (In journalism, we call this phenomenon, think of the headline first and then write a copy justifying the headline).

Can we possibly call this a fudge? I don't know.

When the last budget was presented in February 2018, the government had hoped to achieve a fiscal deficit of Rs 6,24,276 crore or 3.3% of the gross domestic product (GDP) in 2018-19.

Now it hopes to achieve a fiscal deficit of Rs 6,34,398 crore or 3.4% of the GDP. (Of course, the GDP forecast for 2018-19 when the budget was presented in last February, is different from the current GDP forecast for 2018-2019).

In absolute terms, the fiscal deficit of the government went up by a little over Rs 10,000 crore. This, despite the government earning Rs 1,00,000 crore lesser than what it hoped, through the central goods and services tax (GST). Over and above this, the government plans to spend Rs 20,000 crore towards the income support scheme of farmers, a plan which wasn't there when the budget was presented last year.

Further, the money that the government will spend towards recapitalizing banks has also been increased from Rs 65,000 crore to Rs 1,06,000 crore. With all this extra money being needed, why has the fiscal deficit not gone up?

What's happening here?

When the budget was presented in February 2018, the government had hoped to earn Rs 6,03,900 crore through central GST. In the interim budget that Goyal presented last week, the government now hopes to earn only Rs 5,03,900 crore as central GST, which is Rs 1,00,000 crore lower.

One way that the government is looking to fill this gap is through corporation tax, where it expects collections to go up by Rs 50,000 crore to Rs 6,71,000 crore. But this still doesn't fill in the large gap.

The interesting thing is that the central GST collections might actually turn out to be even lower than Rs 5,03,900 crore, which the government hopes to earn. Between April 2018 and January 2019, the central GST collections have stood at Rs 3,77,253 crore, which is still some way away from the revised target of Rs 5,03,900 crore. If the government wants to meet this target it needs to collect Rs 63,323.5 crore on an average, during the two months remaining in this financial year.

The highest central GST that the government has ever collected in a month is Rs 57,893 crore in July 2018. So, history tells us, even the revise central GST target is unlikely to be met. But given that the government has set a revised number for itself, it must be confident of achieving it. Is this a fudge? I don't know.

Is there more to this?

For sure. One point I have often talked about in the past is the Food Corporation of India (FCI) and how it gets treated in the budget. The FCI buys rice and wheat directly from farmers at the minimum support price set by the central government. Having bought the rice and wheat, it then sells this rice and wheat through the public distribution system at a very low price. This is done to meet the requirements of the National Food Security Act and other welfare measures.

Having done this, it needs to be compensated by the government, so that it continues to be in business and has the money to buy rice and wheat, when the next cycle comes around. The government compensates FCI through the money it allocates in the budget through food subsidy.

At the same time, the government accounts operate on a cash basis, which means only the expenditure that has actually been paid for, is treated as an expenditure. An expenditure which is due and has not been paid for, is not an expenditure.

The government uses this loophole, for the lack of a better word, to postpone the payment of the money that it needs to pay to FCI, into the future. Given that no money is paid, no expenditure is incurred. This way the government can control its expenditure.

Now, in order to continue to be in business, FCI has to borrow money. It doesn't face any problem on this end, because the financial system ultimately sees it as an entity of the government and is happy to lend to it.

A closer look at the interim budget presented by Piyush Goyal tells us that the FCI will end up raising Rs 1,56,943 crore from the "others" category, in this financial year. The budget did not specify who these others are.

The FCI website tells us that in 2017-18, the corporation borrowed Rs 1,21,000 crore from the National Small Savings Fund. The contributions made to small savings schemes collections come together in this fund. Given that FCI borrowed from the National Small Savings Fund, the borrowing and the expenditure, which should ideally have been on the books of the government of India, ended up on the books of FCI.

There is another point that needs to be made here. Between April and November 2018, the government had already spent Rs 1,42,458 crore on food subsidies. At this rate, through the year, the government will end up spending Rs 2,13,687 crore on food subsidies. The total allocation to food subsidies in this budget stands at Rs 1,71,298 crore, around Rs 42,000 crore lower.

This could either mean that the government is not paying FCI the right amount that it should or that FCI is going slow on selling subsidised rice and wheat through the public distribution system.

Given that FCI is raising close to Rs 1,57,000 crore from "others", chances are that the government is not paying the right amount to FCI, again this year.

What else?

Like the postponement of food subsidies, a similar formula has been followed for fertilizer subsidies as well as petroleum subsidies. Though the difference in this case, is not as huge as food subsidies.

The Final Point

While the government hopes to run a fiscal deficit of Rs 6,34,398 crore during this financial year, it has already run a fiscal deficit of Rs 7,16,625 crore during April to November 2018. In order to meet the fiscal deficit target, the government now has to run a surplus of Rs 82,227 crore between December 2018 and March 2019.

While, this sounds impossible, it has happened in the past, given that the revenues of the government tend to be backloaded. As economist Mahesh Vyas wrote in a recent column: "Since revenues are back-loaded, it is possible that the last few months - particularly the month of March - does record surplus for the government. This happened twice in the last four years. The surplus was Rs14,300 crore in 2014-15 and Rs 20,400 crore in 2018-19. In 2015-16 and 2016-17, the last four months saw substantial deficits of Rs 49,300 crore and Rs79,800 crore, respectively."

What this tells us is that while surpluses have been run in the past, a surplus of Rs 82,227 crore, seems like a far-fetched idea, especially when Lok Sabha elections are almost there.

Dear Reader, as I said at the beginning, government accounting is all about the assumptions.

And these assumptions can be used to arrive at the desired end.

Does that make it a fudget? Or is it still a budget? That, dear reader, is for you to decide.

Regards,


Vivek Kaul
Editor, Vivek Kaul Publishing

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Vivek Kaul is the editor of Vivek Kaul Publishing, where readers gain sharp, insightful opinions and analysis on India's economy. He is the author of the bestselling Easy Money trilogy. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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