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March 2, 2000

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Devangshu Datta

Budget blues

"Let not the right hand know what the left is doing," the Bible says. Was this perhaps the motto of the first Budget of the Millennium? First of all, there was all the controversy about the Reuters release that supposedly pointed to a leak. And, then there were the Budget documents themselves.

According to the Ministry of Finance Budgetary Estimates (BE), the Primary Deficit (Fiscal Deficit minus Interest Payments) would be Rs 10,009 crore (Rs 100.9 billion). Also, according to the BE, the primary deficit was equal to 0.5 per cent of the GDP. Fair enough I did a back of the spreadsheet calculation and discovered that the gross domestic product (GDP), in that case was estimated at Rs 20,01,800 crore or Rs 20,018 billion.

The next thing one does is look at the Fiscal Deficit. Again, according to BE, this will be 5.1 per cent of GDP -- down there in black and white as Rs 1,11,275 crore (Rs 1,112.75 billion). Again one takes recourse to the trusty spreadsheet to discover that the GDP is apparently Rs 21,81,863 crore or Rs 21,818.63 billion. That difference, of Rs 1,80,062.7 crore between the two GDP calculations, doesn't seem trivial to me. If one believes the Fiscal Deficit figures, then it amounts to 8.25 per cent of the estimated GDP. Alternatively, if one lays greater store by the Primary Deficit, then it amounts to around 9 per cent of the GDP.

Perhaps a look at the Revenue Deficit could shed some light on this discrepancy and resolve the confusion, methinks? There it is in the BE - Revenue Deficit of Rs 77,425 crore (Rs 774.25 billion) equals 3.6 per cent of the GDP. Ergo, GDP equals Rs 21,51,444 crore or Rs 21,514.44 billion. Three different but connected deficits, three different GDP estimates! All in one document! What on earth is going on? Perhaps there's some mistake in summing the earlier entries? But there doesn't seem to be - all the subsidiary columns add up.

So there you have it the chaps who calculated the Revenue Deficit differ radically in their assessment of GDP from the chaps who worked out the Primary Deficit and they all beg to differ from the guys who burnt the midnight oil working out the Fiscal Deficit.

In my youth, an irreverent and long-late great uncle, who was himself an architect of the planned economy, once revealed what he maintained was the best-concealed Budget secret of all. After all the tax and excise and customs imposts had been worked out, a little ceremony would take place at midnight on Budget eve. A blind beggar would be collected from the Hanuman Mandir and ordered to chuck darts in the general direction of a suitably-marked board. The budgetary estimates would be thus derived and according to my great uncle, this process of forecasting was found to be entirely satisfactory. I presume that on this occasion they used three beggars, or perhaps three dartboards and nobody went through a reconciliation process.

The next stage of cross-checking government accounts leads into a curiouser and curiouser maze. According to the Revised Estimates (RE) at current prices, the GDP in 1999-2000 will be around Rs 19,40,368 crore. Actually this is an average of minor discrepancies between the three deficits again. Okay, in that case, one should be able to derive a nominal GDP growth estimate for 2000-2001.

Depending on which Budgetary Estimate of GDP one accepts, nominal GDP growth could vary from 3.17 per cent (Primary Deficit) to 10.87 per cent (Revenue Deficit) to 12.44 per cent (Fiscal Deficit). Take all cases, and factor in the Economic Survey's estimate that Wholesale Price Index (WPI) inflation is currently running at an average 2.9 per cent. Then accordingly adjust for the BE that inflation will stay below the 5 per cent mark. It appears real GDP growth could vary from negative to about 7-8 per cent. Again, the discrepancy isn't exactly trivial, though it arises from the earlier discrepancies in various estimates.

The reader will understand the problems in further critiquing a set of estimates, which lend themselves to such wide interpretations. I'm not even going to try. Instead it may be more interesting to understand the broad strategy behind this Budget if one can dignify the tinkering this year with such a honourable appellation.

The government hopes to raise Rs 71,252 crore in excise (Rs 61,000 crore in 1999-00), Rs 53,572 crore in customs (Rs 47,800 crore), Rs 40,040 crore in corporation tax ( Rs 29,915 crore) and Rs 31,590 crore in income tax (Rs 26,684 crore). Total tax revenues, direct and indirect combined, are estimated to be around Rs 2,00,288 crore. In 1999-00, these tax revenues are estimated to yield around Rs 1,69,979 crore according to the Revised Estimates. So the government hopes to increase tax revenues by around Rs 30,309 crore in the coming fiscal.

It is likely to be disappointed. First, because in case of a negative GDP growth as some of the above GDP assumptions suggest, tax realisations may actually fall. Second, the 17.8 per cent increase in gross tax burden may actually choke off economic growth. Third, because the Laffer curve operates just as strongly in excise and customs as it does in income tax. This is because evasion becomes the operative strategy, the instant rates are raised to levels where it makes economic sense to fudge the books and payoff the inspectors. This may be morally reprehensible but it is reality.

The government actually had a far easier and more people-friendly method of raising perhaps three times as much revenue. At pre-Budget prices, the market value of government equity holdings in public sector undertakings was easily over Rs 100,000 crore. It's book value is perhaps twice or thrice that much. Given a buoyant stock market and a few strategic sales, asset-strips and privatisations, Rs 30,000 crore would have been there for the asking.

Nobody would have needed to bite the bullet. All that was required to ensure a buoyant market was broadly unchanged tax rates and a few breaks and genuine rationalisations here and there. Instead by raising tax rates, the government has guaranteed a failure in market sentiment that will send the market value of government equity plummeting. So it is entirely possible that there will be a shortfall in tax revenues and this will not be compensated by a privatisation drive.

One of the few brave decisions that the government has taken is the cut in general provident fund combined with a cut in food subsidies and fertiliser subsidies. This may rebound in peculiar fashion. Interest rates will undoubtedly fall.

Meanwhile, agriculture has had a bad year - which means that there is an upward pressure on food prices. Free market food prices are usually restrained by leakages from the public distribution system (PDS) system. To put it bluntly, people use false ration cards, buy on the PDS and sell on the free market while maintaining a generous margin. The raising of PDS rates will enhance the velocity of free market uptrends since those PDS leakages will also be higher-priced. A little scarcity always goes a long way when it's an agro-commodity. One only has to recall the onion crisis of 1998, when a 6 percent reduction in the onion crop led to 150 per cent price spikes.

So let us suppose that the WPI starts climbing because of rising food prices. At the same time, interest rates fall. All of a sudden, instead of the current high real rates, we are in a regime of negative real rates. The rational government reaction to negative real rates consists of borrowing huge amounts both to refinance the debt burden cheaply, as well as to force rates up to real positive levels again. The rational individual reaction is to borrow money and buy gold. What would that set of actions do to all the varied Budgetary Estimates? Is it a more absurd or looking glass possibility than the Budget itself?

Devangshu Datta

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