 "Is government busy window-dressing the fiscal deficit?")
Every year, a few weeks before the government's budget is read out in Parliament, the finance ministry is out of bounds to outsiders to guard against any leakage of information on the budget proposals. This year, there won't be a full budget in the Lok Sabha because the country will elect a new government a couple of months from the usual budget session in February. All that Parliament will pass will be a vote on account, which will allow the government to meet expenses until a new regime presents the annual budget for 2014-15. And yet, a veil of secrecy has descended on North Block. What is Finance Minister P Chidambaram up to?
Chidambaram cannot make major changes in tax proposals while seeking a vote on account. Nor can he announce any new schemes. The best explanation, therefore, for the current code of silence at the finance ministry would be that they are working to ensure the fiscal deficit remains at or below 4.8 per cent of the gross domestic product in the account books.
Keeping the fiscal deficit in check has been a Chidambaram trademark in his years at North Block. Of course, other finance ministers like Manmohan Singh, Jaswant Singh and Pranab Mukherjee too had succeeded in reducing the Centre's fiscal deficit sharply in the past. But none in the past 25 years has perhaps been as aggressive or as consistent in reining in spending as the incumbent minister. (MANAGING THE DEFICIT)
Many time-tested ideas and a couple of fresh ones are apparently being employed to show the fiscal deficit as being under control. These range from some arm-twisting tactics - though these are denied by the finance ministry - to sticking scrupulously to the rule book wherever it suits the government. There are several ways in which the revenue-deficit ratio could be manipulated.
Higher advance tax: The ministry may boost tax collections, muted till date, by getting companies to pay a higher advance tax payment with the promise of a refund later. Officials disclose that such a recourse depends on the relationship between the executives of the company concerned and the tax commissioner. Whenever the tax department is under pressure to meet targets, field officers often turn to large taxpayers in their areas, who reportedly oblige them by paying higher advance tax, sometimes under pressure and sometimes as a goodwill gesture to the tax officer. The company can always get a refund later - along with interest. So if someone has idle funds, it's a small price to pay for maintaining a good relationship with the tax officer. The only flip side is that when a new commissioner is appointed he can question the rationale for the payment of high advance tax when profits were expected to be low. It's the incoming government that will take a hit by having to pay refunds along with interest of 6 per cent per annum.
Moderating refunds: Though the process of refunds has been automated, the tax department can still find ways to hold back refunds. If a case is pulled up for scrutiny, refund claims are not settled until the finalisation of assessment proceedings and determination of actual tax liability. Almost 90 per cent of the income tax refunds claimed by taxpayers await such finalisation. If the current government goes slow on refunds this year, it would have an impact on net tax collections next year. Refunds totalling Rs 66,000 crore have been made till December - an increase of 10 per cent over last year in a period when overall net direct tax collections increased 12.5 per cent. Around Rs 82,704 crore and Rs 95,000 crore were refunded to taxpayers in 2012-13 and 2011-12, respectively.
Interim dividend: Public sector undertakings (PSUs) have been asked to make interim payment of dividends for the year ending March 31, 2014, this year itself based on the projections for the entire year's profits. Dividend payment for a financial year is otherwise usually made in the first quarter of the following fiscal, after the declaration of profits. But in the wake of the finance minister's recent meeting with PSUs, Coal India announced a special dividend which will fetch the government around Rs 18,000 crore. This has come at a time when coal imports have increased due to lower production in the country. More companies may follow suit with similar dividend payments this month.
Cuts in expenditure: The spending of many ministries, particularly rural development, health & family welfare and human resources development, has been slashed in the Revised Estimates for 2013-14. Communications and information technology, home affairs and power are among other ministries to see a significant cut. This will help the government show a lower fiscal deficit at the expense of growth. Finance ministry officials, however, point out that in the past if funds allotted have been utilised, no cuts were implemented.
Rolling over subsidies: The government has failed to bring down the fuel subsidy burden this year despite decontrol of petrol prices, partial decontrol of diesel and a cap on LPG cylinders due to depreciation of the rupee concurrent with an increase in global crude oil prices. With an eye on elections, the government is planning to raise the cap on cylinders from nine to 12. As a result, under-recoveries of the oil marketing companies, or the notional loss for selling fuel below the prevailing market price, are expected to touch Rs 1,40,000 crore this year. As the government has provided for only Rs 65,000 crore in the budget, including Rs 45,000 crore for the previous year's liabilities, the onus will be on the next government to fund a significant part of this year's liabilities. The burden of footing the bill for the National Food Security Act, UPA Chairperson Sonia Gandhi's pet project, is also clearly on the next government. When the scheme is fully rolled out, it could cost the exchequer Rs 1,30,000 crore annually. "Every year some amount of subsidy is rolled over to the next year. What is important is the magnitude of the rollover," says Devendra Pant, chief economist & senior director, India Ratings. "Earlier, however, subsidies were considered a part of the debt, thus helping to understate the fiscal deficit."
Cross holdings: Transfer of money from one hand of the government to the other could also help mask deficit figures. After the government failed to tap money from the markets, it asked its cash-rich PSUs to buy government stake in other state-run companies, making the exchequer richer. For instance, the finance ministry will garner around Rs 5,000 crore by selling a 10-per cent stake in Indian Oil Corporation to ONGC and OIL India. However, as India Ratings' Pant points out, this severely limits the buying PSU's capacity to undertake capital expenditure.
Chidambaram's record with fiscal deficits has been good. He reduced the fiscal deficit to 4.9 per cent in 2012-13, against the Vijay Kelkar Committee's estimate of 6.1 per cent. He achieved this by slashing Plan expenditure by Rs 91,838 crore, and the finance minister did not change the rules to get there. All he did was to strictly enforce the existing rules, something his predecessor, Mukherjee, did not despite the deficit ballooning to 5.7 per cent in 2011-12. It was only just before the 2009 elections that Chidambaram had scaled up the fiscal deficit to 6 per cent by paving the way for a pay revision of Central government employees and the waiver of farm debt in the name of a fiscal stimulus to deal with the global economic slowdown.
Prime Minister Manmohan Singh has among the best records as finance minister in reducing fiscal deficit. He inherited Yashwant Sinha's high deficit of 7.9 per cent in 1991-92 and brought it down to 5.6. In Sinha's three terms at various times, the deficit remained fairly high, with the 6.2 per cent deficit in 2001-02 rapidly decreasing to 4.5 in 2003-04 under Jaswant Singh. The deficit saw major variations during Mukherjee's term from a high of 6.5 per cent in 2009-10 (allowed deliberately due to the global economic crisis) to a low of 4.8 per cent in 2010-11.
Chidambaram cannot make major changes in tax proposals while seeking a vote on account. Nor can he announce any new schemes. The best explanation, therefore, for the current code of silence at the finance ministry would be that they are working to ensure the fiscal deficit remains at or below 4.8 per cent of the gross domestic product in the account books.
Keeping the fiscal deficit in check has been a Chidambaram trademark in his years at North Block. Of course, other finance ministers like Manmohan Singh, Jaswant Singh and Pranab Mukherjee too had succeeded in reducing the Centre's fiscal deficit sharply in the past. But none in the past 25 years has perhaps been as aggressive or as consistent in reining in spending as the incumbent minister. (MANAGING THE DEFICIT)
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In addition to winning the Congress minister points for managing financial prudence, the exercise to keep the fiscal deficit low will also serve to put pressure on the next government. This will not worry Chidambaram unduly, for opinion polls and street wisdom point to the likely ouster of the ruling United Progressive Alliance government in the forthcoming elections. So, presumably, Chidambaram is engaged in a financial jugglery to ensure adequate revenues in this year's books, while passing on liabilities to the next government.
Many time-tested ideas and a couple of fresh ones are apparently being employed to show the fiscal deficit as being under control. These range from some arm-twisting tactics - though these are denied by the finance ministry - to sticking scrupulously to the rule book wherever it suits the government. There are several ways in which the revenue-deficit ratio could be manipulated.
Higher advance tax: The ministry may boost tax collections, muted till date, by getting companies to pay a higher advance tax payment with the promise of a refund later. Officials disclose that such a recourse depends on the relationship between the executives of the company concerned and the tax commissioner. Whenever the tax department is under pressure to meet targets, field officers often turn to large taxpayers in their areas, who reportedly oblige them by paying higher advance tax, sometimes under pressure and sometimes as a goodwill gesture to the tax officer. The company can always get a refund later - along with interest. So if someone has idle funds, it's a small price to pay for maintaining a good relationship with the tax officer. The only flip side is that when a new commissioner is appointed he can question the rationale for the payment of high advance tax when profits were expected to be low. It's the incoming government that will take a hit by having to pay refunds along with interest of 6 per cent per annum.
Moderating refunds: Though the process of refunds has been automated, the tax department can still find ways to hold back refunds. If a case is pulled up for scrutiny, refund claims are not settled until the finalisation of assessment proceedings and determination of actual tax liability. Almost 90 per cent of the income tax refunds claimed by taxpayers await such finalisation. If the current government goes slow on refunds this year, it would have an impact on net tax collections next year. Refunds totalling Rs 66,000 crore have been made till December - an increase of 10 per cent over last year in a period when overall net direct tax collections increased 12.5 per cent. Around Rs 82,704 crore and Rs 95,000 crore were refunded to taxpayers in 2012-13 and 2011-12, respectively.
Interim dividend: Public sector undertakings (PSUs) have been asked to make interim payment of dividends for the year ending March 31, 2014, this year itself based on the projections for the entire year's profits. Dividend payment for a financial year is otherwise usually made in the first quarter of the following fiscal, after the declaration of profits. But in the wake of the finance minister's recent meeting with PSUs, Coal India announced a special dividend which will fetch the government around Rs 18,000 crore. This has come at a time when coal imports have increased due to lower production in the country. More companies may follow suit with similar dividend payments this month.
Cuts in expenditure: The spending of many ministries, particularly rural development, health & family welfare and human resources development, has been slashed in the Revised Estimates for 2013-14. Communications and information technology, home affairs and power are among other ministries to see a significant cut. This will help the government show a lower fiscal deficit at the expense of growth. Finance ministry officials, however, point out that in the past if funds allotted have been utilised, no cuts were implemented.
Rolling over subsidies: The government has failed to bring down the fuel subsidy burden this year despite decontrol of petrol prices, partial decontrol of diesel and a cap on LPG cylinders due to depreciation of the rupee concurrent with an increase in global crude oil prices. With an eye on elections, the government is planning to raise the cap on cylinders from nine to 12. As a result, under-recoveries of the oil marketing companies, or the notional loss for selling fuel below the prevailing market price, are expected to touch Rs 1,40,000 crore this year. As the government has provided for only Rs 65,000 crore in the budget, including Rs 45,000 crore for the previous year's liabilities, the onus will be on the next government to fund a significant part of this year's liabilities. The burden of footing the bill for the National Food Security Act, UPA Chairperson Sonia Gandhi's pet project, is also clearly on the next government. When the scheme is fully rolled out, it could cost the exchequer Rs 1,30,000 crore annually. "Every year some amount of subsidy is rolled over to the next year. What is important is the magnitude of the rollover," says Devendra Pant, chief economist & senior director, India Ratings. "Earlier, however, subsidies were considered a part of the debt, thus helping to understate the fiscal deficit."
Cross holdings: Transfer of money from one hand of the government to the other could also help mask deficit figures. After the government failed to tap money from the markets, it asked its cash-rich PSUs to buy government stake in other state-run companies, making the exchequer richer. For instance, the finance ministry will garner around Rs 5,000 crore by selling a 10-per cent stake in Indian Oil Corporation to ONGC and OIL India. However, as India Ratings' Pant points out, this severely limits the buying PSU's capacity to undertake capital expenditure.
Chidambaram's record with fiscal deficits has been good. He reduced the fiscal deficit to 4.9 per cent in 2012-13, against the Vijay Kelkar Committee's estimate of 6.1 per cent. He achieved this by slashing Plan expenditure by Rs 91,838 crore, and the finance minister did not change the rules to get there. All he did was to strictly enforce the existing rules, something his predecessor, Mukherjee, did not despite the deficit ballooning to 5.7 per cent in 2011-12. It was only just before the 2009 elections that Chidambaram had scaled up the fiscal deficit to 6 per cent by paving the way for a pay revision of Central government employees and the waiver of farm debt in the name of a fiscal stimulus to deal with the global economic slowdown.
Prime Minister Manmohan Singh has among the best records as finance minister in reducing fiscal deficit. He inherited Yashwant Sinha's high deficit of 7.9 per cent in 1991-92 and brought it down to 5.6. In Sinha's three terms at various times, the deficit remained fairly high, with the 6.2 per cent deficit in 2001-02 rapidly decreasing to 4.5 in 2003-04 under Jaswant Singh. The deficit saw major variations during Mukherjee's term from a high of 6.5 per cent in 2009-10 (allowed deliberately due to the global economic crisis) to a low of 4.8 per cent in 2010-11.