A non-performing government’s Finance Minister waved the magic wand and, lo behold, the fiscal deficit came down. How it happened is the subject of this week’s Saturday Special
Usually, all analyses of the annual Budget end within a week of its tabling in the lok Sabha. But serious thinkers of the economy have a different way of understanding the annual exercise. S Gurumurthy makes it a point every day to make his contribution after the last chatterbox has made his exit.
‘Guru’ likes to say, “It’s impossible to form an understanding of the Budget unless one goes through the entire lot of papers tabled over the last two days of February. I cannot be part of that group which comes up with instant reactions.”
Going through this week’s Main article, it’s easy to see that the three weeks that this skilled chartered accountant took out for serious analysis did not go in vain. He went to the core of Finance Minister Palaniappan Chidambaram’s claim of having ‘reined in’ the deficit and found glaring inconsistencies bordering on deception. The gross domestic product (GDP) was estimated to be lower than 2011-12 by Rs 1.32 lakh crore. Revenues were admittedly lower by Rs 6,000 crore. Guru points out that the deficit for 2013-14, which is only an estimate and whose veracity will be known only when the actual figures are made available next year, is based on a fallacy. The ‘miracle’ was the disclosure that the fiscal deficit for 2012-13, which is based on available statistics, is only 5.2 per cent. That said, ‘Guru’ went on to deploy the probity which makes his profession — auditing — unique.
Now, a month before the Budget, it was reported that the FM was under pressure to slash the outlay for the coming year on important matters like welfare, defence and infrastructure to achieve his objective of lowering the targeted fiscal deficit. The source of this story was not the finance ministry, but other ministries whose heads were irked by the fact that in an election year they’d be forced to make do with lower outlays.
Establishment view
The UPA-2 government faced numerous challenges as it began its final year. The biggest ones are low growth, the widening fiscal and current account deficits, high inflation and, of course, the failure to meet the targeted revenue collection. The middle class looked forward to tax breaks, but its hopes were dashed to the ground. The only mercy he granted was a break of Rs 2,000 to individual tax payers with taxable income of up to Rs 5 lakh. This will benefit 18 million taxpayers and imply the government forgoing revenue of Rs 3,600 crore.
In addition, middle class people chasing dreams of having their own home will get an additional deduction of interest of Rs 1 lakh for home loans up to Rs 25 lakh over and above the Rs 1.5 lakh already allowed for self-occupied dwellings.
The establishment view also holds that Mr Chidambaram has done well by outperforming on his target of reducing the fiscal deficit from 5.3 per cent of GDP to 5.2 per cent for the fiscal year which is about to end. The FM has now fixed a target of 4.8 per cent of GDP for 2013-14.
This view also holds that defence allocation has been upped by 14 per cent over the revised estimates in the current fiscal. Similar hikes have been proposed in various sectors. It is evident to these analysts that he has managed to create a cushion through compression in spending during the current financial year. Expenditure under several key heads, including roads and rural housing is claimed to have fallen in the current fiscal in relation to the previous year.
On domestic corporates with taxable income of Rs 10 crore, the surcharge has been raised from 5 per cent to 10 per cent, while foreign companies will pay an increased surcharge of 5 per cent instead of 2 per cent earlier. The Finance Minister noted that the surcharges will be in place just for a year to tide over the difficult situation even thought the 3 per cent education cess would continue to be applicable on all tax payers.
To eliminate tax evasion through under-valuation and under-reporting of property sale transactions, Mr Chidambaram has proposed a tax deduction at source of 1 per cent on all transfers of immovable properties for a consideration above Rs 50 lakh, while exempting agricultural land from the levy. Alongside, while marginally reducing the Securities Transaction Tax (STT), he introduced a new Commodities Transaction Tax (CTT) on non-agricultural commodities futures, possibly to keep a trail on trading in bullion.
As for indirect taxes, the peak customs and excise duties and service tax, all remain unchanged although the import duty on high-end luxury cars, motorcycles and yachts have been raised from 75 per cent to 100 per cent and excise duty on SUVs from 27 per cent to 30 per cent. An additional excise of 18 per cent has also been levied on cigarettes, cigars, cigarillos and cheroots.
The crude essence of all this is that Mr Chidambaram makes the aam aadmi pay more for petrol and diesel every fortnight. “There is no free lunch,” he says. But then he proceeds to take away our money from their pockets without thinking of inflation. And he makes A/C restaurants costlier. ‘Eat at home, eat healthy’ must be his motto. And save petrol in the bargain. Only thing the prices of vegetables are skyrocketing.
The bottom line
As Guru points out, Mr Chidambaram has suppressed an important information, which, with the help of his cheerleaders in the pink press, has resulted in a huge deception.
He did not reveal that his “achievement” of reducing the deficit has actually led to the nation being deprived of development expenditure totaling some Rs 92,000 crore. Had he not cut development spending by almost 18 per cent, the fiscal deficit for 2012-13 would be not 5.2 per cent as he had proudly said, but 6.1 per cent — 0.8 per cent over the Kelkar redline.
This is the true story of how the Finance Minister has kept his promise of fiscal discipline — a fiscal discipline drama that smuggled in and set off the fiscal indiscipline of Rs 68,000 crore extra non-development spend into the development spending cut of Rs 92,000 crore and totally suppressed the true story in the budget speech. The cut in the development spending by Rs 92,000 crore was partly used to set off the overrun of Rs 32,000 crore in Non-development spend and to bring down the deficit by Rs 60,000 crore. The Budget papers admit this truth.
Swarn Kumar Anand (The writer is News Editor, The Pioneer)