Several statements in the Mid-Year Economic Analysis are intriguing. For example, paragraph 1.4 says, “It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP ” and quantifies the hit at 0.2 per cent. Nevertheless, paragraph 1.5 asserts, “As in FY 2015, so too this year, the government’s commitment to meet announced fiscal targets is steadfast… If the typical pattern of revenue collection and spending is taken into account, the first half outturn is well in line with meeting the year’s target. ”
That is welcome optimism. It quickly dispelled a momentary doubt. Yet I was intrigued why the doubt arose in the first place. I was also intrigued by the disarming modesty of the claim that the government will meet the annual target.
Why not admit windfall?
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Why is the government shy to admit that it has reaped an oil windfall? In May 2014, Brent crude oil was selling at USD 109.5 per barrel. In September 2014, it was selling at USD 97.5 per barrel, and then the crash began. Its impact on the price of the Indian basket of crude oil can be gathered from the following:
September 2014: USD 97.0
January 2015: 46.9
Since January 2015, the price has remained range bound and, in recent weeks, has fallen further. Two days ago, Brent crude price fell below USD 34 per barrel!
I made an attempt to estimate the “savings ” in the import of crude oil during the period December 2014 to November 2015 compared to the same period of the previous year (December 2013 to November 2014). The comparable average price for the two 12-month periods are USD 53.6 and USD 101.3, a saving of USD 47.7 per barrel!
In US dollars, the saving is about USD 40 billion (USD 93.47 bn – USD 52.74 bn). In Indian rupees, applying the prevailing exchange rates during the respective periods, the saving is estimated at Rs 233,000 crore (Rs 570,000 cr – Rs 337,000 cr) during the 12-month period.
Of course, the financial year is April 2015 to March 2016 and hence the estimated saving of Rs 233,000 crore may not be accurate. In my view, it would actually be more because crude oil prices have declined further since November 2015.
What did the government gain?
The “saving ” or gain is to the whole economy and will be shared among the government, corporates and households. The next step is to estimate the share of the gain that went to the government. The government has gained in three ways: (1) additional taxes levied on petroleum and petroleum products after the budget; (2) lower subsidy bills for fertilizer, LPG and kerosene; and (3) reduced expenditure on consumption of petroleum products by government departments, especially railways and defence.
I do not wish to burden (or bore) you with the math. I estimate that the government’s share will be about 60 per cent of the oil windfall of Rs 233,000 crore, that is, about Rs 140,000 crore. The more interesting question is, how did, or how will, the government use this gain?
The Controller General of Accounts has reported the revenue and expenditure figures up to November 2015. On the receipts side, net tax revenue, non-tax revenue and recovery of loans are performing better compared to the previous financial year and the 5-years moving average. Only capital receipts are lower, presumably because the disinvestment plan is in a shambles. On the expenditure side, as a percentage of the budget estimates, up to
November, total expenditure is 64.3 per cent, compared to 59.8 per cent last year and the average of 60.4 per cent over the last five years.
Therefore, there is nothing extraordinary about the actual receipts or expenditure of government so far. No department is expected to spend more than the budgeted amount. No department has been allocated additional funds. No extraordinary promise of funds has been made for any other purpose. There is no indication that the government has pre-paid any loans or has advanced the redemption of bonds to reduce the stock of debt. It seems to be business as budgeted.
Where did the gain go?
So, the question at the end of the year will be, where did the windfall go? I suspect the answers will be:
1. “We did not achieve the disinvestment target.” That would not be very complimentary to a government that advocates privatisation of public sector enterprises!
2. “We failed to achieve the tax revenue targets.” If this happens, despite the additional taxes levied post-budget, that would not be very complimentary to the department of revenue!
3. “Lower nominal GDP growth resulted in a higher fiscal deficit. ” If the government did not anticipate lower nominal growth despite warnings (and did not have a Plan B), that would not be very complimentary to a government (and party) that claimed to have all the answers to the challenges faced by the economy!
The gain has been used to fill these gaps. Imagine the benefit that would have accrued to the economy if public investment had got a Rs 140,000 crore boost! Imagine the greater welfare that would have accrued if the budget cuts to crucial programmes had been restored!
We got a windfall. And it has gone with the wind.