The reality, however, is quite different. So far, this year, the government has not paid out a single penny out of its share of oil subsidy although it forces the oil marketing companies (OMCs) to sell the diesel, kerosene and LPG as below market prices. In November 2012, the government decided to pay Rs.300 billion to the OMCs as their share of oil subsidy. Had that been paid out by December, the fiscal deficit for the nine-month period would have risen to Rs.4346.99 billion, higher than reported. Even this is an under-statement. According to Petroleum Planning & Analysis Cell, total under-recovery by OMCs during Apr-Dec’12 was Rs.1249 billion. Like last year, if the government forces the upstream oil companies to bear 40% of the burden, the government’s share turns out to be Rs.749 billion and not Rs.300 billion they agreed to pay out so far. Taking that into account, the actual deficit during Apr-Dec’12 should have been Rs.4796 billion, which would have meant that the deficit would have been close to 94% of what was budgeted and not 78.8% as reported.
Readers would do well to remember that, even last year, the government played the same trick to keep the reported deficit under 6% (of GDP). The government, rather than paying out their entire share of oil subsidy within the financial year itself, paid out the last installment of their share (Rs.385) billion during the current year by borrowing from current year’s provision. IN essence, it has started the new practice of borrowing from the future to meet its current expenditure requirement just to show that they have not deviated much from objective of fiscal consolidation. In fact, had the remaining subsidy been accounted for during the previous financial year itself, the actual fiscal deficit would have been 6.2% of GDP and not 5.8% as reported.
Fact is, this government and the current Finance Minister has the habit of resorting to accounting jugglery (rather than real action on the ground) to show to the world that they are sticking to their promise of fiscal prudence.
In his previous stint in the job, in 2004, the FM took the grand stand of announcing the Fiscal Responsibility and Budget Management Act, which sought to reduce the revenue deficit to zero and the fiscal deficit to 3% of GDP within five years. But the government soon realized that it had gone too far and had to engage in some creative accounting to make the numbers add up. So it pushed certain expenditures off its balance sheet.
The result? The issuance of oil bonds, fertilizer bonds, and suchlike instead of granting direct subsidies. The obvious reason to issue bonds instead of paying in cash is that there is no immediate cash outflow for the government. The not-so-obvious reason is that the bonds are kept off the government’s financial statements. In other words, they are not reflected in the fiscal deficit. So the government was able to show a combined deficit (of the central and state governments) of 4.09% by 2007-08. In reality, without its accounting juggling act, the deficit would have been much higher.
The International Monetary Fund, which includes all such items that otherwise are excluded, said India’s general government deficit in calendar year 2008 was 8.7% of GDP and it rose to 10% of GDP by 2009.
Moral of the story (as I have to tell my daughter every time I tell her a story), don’t believe in the reported number. Reality can be scarier than one is made to believe.
Even the austerity measure announced with much fan fare would have its own implication. There’s a three-pronged approach to expenditure control.
· Cutting down in wasteful expenditure, like unnecessary travel. That’s a positive and mostly doable
· Cutting down on expenditure on social sector schemes. That does not seem to be doable enough. Already there’s plenty on protest that’s happening internally. With everybody in election mode (remember general assembly election would be held in 2014), this maybe easier said than done
· Cutting down on capital expenditure, most notably on roads. This is doable since this is along the path of least resistance. If history is any indication, we have seen numerous instances of government of the day cutting down on capital expense during the final quarter just to be able to control the deficit. But with the country in desperate need of augmenting the quantity and quality of its physical infrastructure, this can only come at the cost of future growth
Other option of course remains deferring its share of oil subsidy to next year. While this will mean that the OMCs will continue to bleed, it will herald the beginning of a devious accounting practice that will come back to haunt us in the future.