How could the percentage of fiscal deficit have come down?

“I have spent more, yet, I have brought down the fiscal deficit for 2010-11 from 5.5 per cent to 5.1 per cent,” claims Finance Minister Pranab Mukherjee. The amount of fiscal deficit has actually gone up by Rs.20,000 crore. How then could the percentage of fiscal deficit have come down? It defies the logic of numbers. Yet, none of the commentators in awe of his miracle have asked Mr. Mukherjee how he achieved the miracle. It is not his feat. Runaway inflation did the trick, not the Finance Minister. Surprised? Read on.

In his budget speech for 2010-11, the Finance Minister had fixed the fiscal deficit of Rs.3.81 lakh crore at 5.5 per cent of the GDP of Rs.69.35 lakh crore estimated by the CSP at current prices for 2010-11. But thanks to hyperinflation that hit the people of India, the GDP at current prices — also called nominal GDP — rose from the estimated Rs.69.35 lakh crore to Rs.78.78 lakh crore in 2010-11. The rise of Rs.9.57 lakh crore is pure inflation. As a percentage of the new, inflated nominal GDP figure of Rs.78.78 lakh crore, the fiscal deficit of Rs.4 lakh crore came down to 5.1 per cent. Had inflation not escalated, the estimated GDP of Rs.69.35 lakh crore, the fiscal deficit would risen to 5.8 per cent, not fallen from 5.5 per cent. The Medium Term Fiscal Policy Statement annexed to the budget obliquely admits this fact. It says that “higher nominal growth in GDP” — which is just inflation — has helped in reducing the fiscal deficit

The gap between real and nominal GDP is inflation. Year after year, from 2005-6, this inflationary gap between the real and nominal GDP has been incrementally enlarging. In 2005-06 the gap was 9.4 per cent; in 2006-07, it rose to 16.9 per cent; in 2007-08, it enlarged to 21.8 per cent; in 2008-09 it topped 31.3 per cent; and in 2010-11, the gap became an all time high at 38 per cent, equal to Rs.30 lakh crore. Imagine, had the gap between the real and nominal GDP for 2010-11 not risen over the percentage of the gap in 2005-06, the fiscal deficit for 2010-11 would have been as high as 21 per cent! And had it been the same as in 2009-10, the fiscal deficit for 2010-11 would have been 7.5 per cent. When inflation is high the GDP-fiscal deficit ratio becomes almost meaningless. So much for the reduction in fiscal deficit acclaimed as “fiscal consolidation,” “safe play,” “cutting spend.”

Curiously, inflation escalated the nominal GDP year after year from 2005-06, but surprisingly, not particularly the indirect tax revenues proportionately. This makes the comparison of nominal GDP with fiscal deficit misleading. It also takes us to the confession of the Finance Minister that he has not mobilised revenue in this budget. The media has eulogised him for sparing corporates from a higher dose of tax, and still managing the deficit. The truth is that the United Progressive Alliance (UPA) has altogether stopped taxing corporates and others who are tax worthy. The excise revenue as a percentage of the real GDP is now almost half of what it was in 2005-06; in terms of nominal GDP it is even less. According to the Economic Survey 2010-11, the ratio of excise revenue to GDP has come down from 3 per cent in 2005-06 to 1.7 per cent in 2010-11 and customs from 1.8 per cent to 1.5 per cent. On the basis of the excise-customs to GDP ratio of 2005-06, the government has under-levied excise by Rs.1,00,000 crore and customs duty by Rs.43,000 crore in 2010-11, totalling Rs.1,43,000 crore. The under levy of excise started in 2006-07 at Rs.13,000 crore, rose to Rs.63,000 crore in 2008-09 when stimulus was introduced, and to Rs.81,000 crore in 2009-10. Even if the fiscal stimulus — calculated with 2007-08 as the base — of Rs.59,000 crore in excise and in customs of Rs.41,000 crore are deducted, the under levy is still Rs.43,000 crore. It means that the UPA government has simply refused to levy the legitimate tax. But, despite huge tax cuts, inflation is hitting the roof. Yet on the fear and threat that withdrawal of stimulus would intensify inflation, the stimulus continues. Is it justified? Read more.

It is not that corporates are in distress; in fact, they never were. An analysis of the profits of corporates given in the statements of revenue foregone attached to annual budgets shows that corporates have been making huge profits. The companies surveyed posted a profit before tax of Rs.4.08 lakh crore in 2005-06; Rs.7.11 lakh crore in 2007-08; Rs.6.68 lakh crore in 2008-09 [global meltdown year] and Rs.8.24 lakh crore in 2009-10. Most of the super profits in 2009-10 — a rise of 23.35 per cent in just one year — is clearly the stimulus cuts not passed on to the public. The super profits make the continuance of stimulus unjust. The story doesn't end here. Thanks to exemptions, corporates have paid far less than the statutory rates of excise, customs and income taxes. Taxes thus foregone by the government have been rising from year to year from 2005-06 – from 50 per cent of the tax collected in that year to 72 per cent of the tax collected in 2010-11. For the year 2010-11, the tax giveaways, including excise-customs waivers of Rs.3.62 lakh crore, totalled Rs.5.12 lakh crore. The stimulus cut of Rs.1 lakh crore, and an under-levy of Rs.43000 crore are on top of the tax foregone. Moreover, the big corporates manage to pay less than the small ones. If they pay as much, the extra tax realised for 2010-11 could have been Rs.14,470 crore.

Contrast the giveaways of several lakh of crores with the admission in the Economic Survey that capital formation in the agricultural sector, which employs 58 per cent of Indian people, has, from 2005-06, stagnated around 7.5 per cent of the total capital formed in the economy. The survey says that a huge investment is needed to make agriculture viable and sustainable. A fraction of the giveaways to corporates could save Indian agriculture from stress. No seer is needed to say that the budget could not be more unjust, inequitable, and morally wrong. And yet this budget is branded as an aam aadmi budget.

The Finance Minister could not have trivialised the issue of black money abroad more. In his budget speech, he has just repeated what he told the media on January 25, 2011. He has pontificated on corruption. His written brief on the implementation of programmes he had announced in the previous budget shows that out of 66 programmes, only 25 have been completed, many of them paper work. Yet the media discourse has hardly noticed these critical issues.

There are positives, but the hidden vices in the budget make them cosmetic. Anyway the positives have been highlighted so disproportionately that it is a waste of media space to repeat them here. On a lighter note to end: the entry of ‘onion' in the budget speech has raised its importance to that of infrastructure!

Email: guru@gurumurthy.net

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