Devangshu Datta: Balance-sheet blues

WORM'S EYE VIEW

Take a theology, any theology. Chances are it's incompatible with double-entry accounting. There will usually be some equalising concept of sin and punishment or karma and reincarnation.

But at the heart of every religion is the miracle of creation. First, there was nothing, then there was something, and perhaps, in time, there will eventually be nothing again.

As they tell you in accounting 101, that's not how a business works. Sure, you can write down depreciation and reduce the value of an asset to nil, if necessary. But you cannot make something from nothing "" value has to be infused, whether through equity or loans or profits.

I once heard a drunken accountant argue his way around this philosophical hurdle by suggesting that the act of creation was the equivalent of a divine infusion of equity into the great balance-sheet in the sky.

It's about the best an accountant can do in terms of reconciliation of religious beliefs with the generally accepted accounting principles (GAAP), though this seems unlikely to catch on as the central tenet of a fashionable cult even in the wilds of Silicon Valley where this gent resides.

Come Budget time, finance ministers probably wish they had the divine latitude to infuse cash from somewhere into the national balance-sheet. Without that, it doesn't make a pretty picture. Governments have few sources of income and many, many, heads of expenditure.

In terms of profit and loss, the government of India (GoI) has been in the red for decades. The revenue deficit can be considered roughly equivalent to operating losses before interest, depreciation and other financial charges.

The fiscal deficit can be termed the net loss after those financial charges are taken into account. In effect, the GoI stays afloat because the entities subject to its jurisdiction pay progressively higher taxes or lend it money on easy terms in order to be allowed to live in peace.

This is where the analogy between government and a body corporate breaks down. A joint stock corporation that performed so abysmally wouldn't last decades.

At some stage, trading would be suspended in the stock; debtors would go to court to force the company into liquidation. Every officer of the company would be sacked and many would end up in jail facing charges of peculation and fraud.

The complete lack of accountability is what makes government so dangerous. It has powers of coercion that it writes into law. The individuals running it are shielded in cloaks of immunity.

In effect, the limits to the entity's powers are set by the entity itself and, it doesn't require a degree in law to suggest that involves conflict of interest.

A government differs from divinity in only two important ways as far as its subjects are concerned. Governments lack the ability to create something from nothing and most governments are less competent than deities are commonly supposed to be.

There have been some welcome attempts to bring transparency and accountability into the GoI's functioning over the last 15 years. The concept of reining in the fiscal deficit was first mooted only in the 1990s. A time-schedule for wiping out the revenue deficit only came after the turn of the century.

Concepts such as non-interference with the running of government-owned businesses and the appointment of (nominally) independent regulators are still not fully accepted. Every paid-up member of the babu-neta club will agree with these sentiments in public "" and wriggle very hard before actually implementing them.

There are, of course, no penalties if the revenue deficit isn't wiped by 2008. If the United Progressive Alliance (UPA) reckons it can win the next election by ignoring this target, they'll blithely chuck it into the waste-bin.

Does the UPA think it can ignore this? We'll get an indication when the Budget comes up because keeping that commitment involves chopping roughly 3 per cent off expenditure over the next three fiscal years.

Alternatively it involves raising the same amount from whatever combination of sources the FM can dream up. If this Budget doesn't initiate the process, God's intervention will really be necessary.