Budget Basics: How the books are (not) balanced

Varsha Chitale

It's that time of the year when dinner conversations inevitably veer round to the topic of the forthcoming Budget.

For one month - a fortnight before the Budget and a fortnight after, there is heated discussion, fist-banging, threadbare analysis - a kind of fever grips everybody. The government is put on the mat.

And then for the rest of the year, the financial planners are left to their own devices, to manipulate and fudge the accounts… till its time for them to face the Budget gruel again.

So if you have thus far remained uninitiated to this circus, relegated to being silent spectators in the drama because you are unfamiliar with the jargon everybody is throwing around, here's a low down on what the government's accounts look like.

A lot of people use terms like 'deficit' and 'debt' very loosely without really knowing exactly what they mean, so you can now zap them with your knowledge.

Government Expenditure is divided into Plan and Non-Plan expenditure. And no, non-plan does not mean that the expenditure is unplanned.

'Plan' in this context indicates what is covered in the Five-Year Plan. Non-Plan expenditure covers defence expenditure, interest payments and subsidies and grants to states. It can be divided into revenue account and capital account - that is, simply, expenditure that gets consumed and one that creates some productive assets.

Defence personnel salaries, interest payments and subsidies would come under Non-Plan revenue expenditure. Just to get an idea of the quantum of the numbers involved, last year's (2001-2002) Budget put the total Non-Plan expenditure at Rs 2,751 billion.

The total central Plan outlay last year was Rs 951 billion. This includes Plan assistance to states and union territories.

Plan expenditure can again be split into revenue and capital components. Needless to say, a majority of the money is spent on revenue expenditure, i.e. salaries, overheads and other stuff, which does very little for the development of the economy.

The central government funds its expenditure mainly through taxes - income tax, corporate tax, excise and custom duties.

Its non-tax revenue come from interest received and surpluses of PSUs, financial institutions and other departmental undertakings like the railways, Post, etc.

Recoveries of loans from states (and others) and the government borrowings make up the capital receipts of the government.

		2001-2002 Budget Estimates
	REVENUE	(Rs. billion)
A	Revenue Receipts	2,317
	i) Tax Revenue	1,630
	ii) Non-tax Revenue	687
B	Capital Receipts	1,435
	i) Recoveries of Loans	152
	ii) Other Receipts	120
	iii) Borrowings and Other Liabilities	1,163
C	Total Receipts (A+B)	3,752
	EXPENDITURE
D	Non-plan Expenditure	2,751
	i) On Revenue Account	2,503
	Of which, Interest Payments	1,123
	ii) On Capital Account	248
E	Plan Expenditure	1,051
	i) On Revenue Account	602
	ii) On Capital Account	349
	iii) Additional	50
F	Total Expenditure (D+E)	3,752
G	Revenue Expenditure D (i) + E (i)	3,106
H	Capital Expenditure D (ii) + E (ii)	646
I	Revenue Deficit A - G	(-)788
J	Budgetary Deficit C - F	0
K	Fiscal Deficit J - B (iii)	(-)1,163
L	Primary Deficit K - D (i)(a)	(-)40

The total receipts and expenditure rarely match. The discrepancy between the two is the budget deficit (there is never a surplus!). Moreover, every year the government exceeds its own estimates of deficits, and has to borrow to meet the shortfall.

In calculating the fiscal deficit, government borrowings are not included on the revenue side of the budget. It is therefore the cash by which the government is short to cover the proposed expenditure.

The target for fiscal deficit is set as a percentage of GDP. Also, most of the revenue numbers depend on the GDP growth. This has made things very awkward for the government this year as GDP growth is likely to be less than 5%, while the projected rate was 6.5%.

Hence, against the target deficit of 4.7% of GDP, the actual deficit might well exceed last year's 5.1%.

Primary deficit also called non-interest deficit and is the fiscal deficit without taking into account the interest payments.

Revenue deficit, the difference between the revenue receipts and revenue expenditure is the cause of much aggravation as it indicates the extent to which capital receipts are being used by the government to finance consumption expenditure - a situation that is clearly not viable or desirable in the long run.

Drawing a desi analogy, it's like taking a loan for feeding the village at your daughter's wedding. The loan has to be repaid, but no additional productive assets have been created with which to repay.

So what does the government do to make good the budget deficit? It builds up its liabilities - internal debt, external debt and other liabilities. Other liabilities are mainly debt held by common folk like you and me in the form of PPF, small saving schemes, etc.

Rising liabilities of the government should get us all agitated because these need to be serviced in future - and you, me or our children will ultimately have to pay the bill!

If the government deficit is financed by the RBI holding more government securities (monetisation - in plain-speak the RBI prints more money) there is the ever looming fear of inflation. The other option is market borrowing, which leads to more expensive debt for the government and also tends to crowd out private borrowing and investment, thus affecting the growth rate.

The government's existing liabilities tell a sorry tale - but that's another story in itself…..

The government's books at the end of the financial year ending Mar 2002 will certainly not make a pretty picture. The fiscal deficit (as a proportion of GDP) is most certainly higher than expected.

Tax collections have been poor and the divestment target of Rs 120 billion will not be met. Besides, there has been the additional burden of rebuilding costs due to the Gujarat earthquake.

The need for infrastructure investment is becoming more vital every year. The government cannot raise too much money from the market as this is hampering economic growth. However, since inflation is low, the government might just decide to spend, and monetise the deficit.

Unfortunately, the Fiscal Responsibility Bill, which has been promised for two years, is gathering cobwebs.

Every time the Bill is supposed to be passed by the Parliament, it gets postponed due to some trivial, political agitation. If and when it does make it through (even with whatever flaws it may have), it won't be a day too soon.

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