Opinion Deficit matters

What is definition of the fiscal deficit? That sounds like a simple question.

New DelhiMarch 5, 2011 11:27 PM IST First published on: Mar 5, 2011 at 11:27 PM IST

What is definition of the fiscal deficit? That sounds like a simple question. Fiscal deficit is current revenue and non-debt capital receipts subtracted from total expenditure.

If one looks at budget papers,fiscal deficit is defined as (1)+(5)+(6),subtracted from (16). (16) is total expenditure,divided into revenue and capital expenditure. (1) is revenue receipts,tax and non-tax. (5) is recoveries of loans and (6) is other receipts,wherein lies the problem.

Defined as it is in the budget papers,we have a fiscal deficit of 5.1% in 2010-11 and 4.6% in 2011-12 and FM has been applauded for the fiscal consolidation exercise. However,there were other receipts of Rs 22,744 crores in 2010-11 and projected other receipts of Rs 40,000 crores in 2011-12.

These come from disinvestment and auctions of spectrum. Should these be shown as revenue items? If so,fiscal deficit numbers provided by the government are correct.

However,if these are shown as receipts from sales of assets,and not as revenue,the numbers are different. For example,the fiscal deficit/GDP ratio will be 6.7% in 2010-11 and 5.0% in 2011-12,less impressive as a fiscal consolidation exercise. This is more than taxonomy and semantics,because we are interested in fiscal deficits because we are interested in how they are financed.

It isnt very clear whether India has an agreement with IMF about how such items are to be shown. Regardless of an agreement,because IMF and World Bank treat these items differently,we will have different deficit numbers when they surface from such sources.

One hesitates to call government figures window dressing,but there is a slight sleight of hand. This is even more pronounced because of the governments creative innovation of a new concept known as the effective revenue deficit.

This looks a respectable 2.3% of GDP in 2010-11 and 1.8% in 2011-12 and is defined as revenue expenditure,minus grants for the creation of capital assets. The objection is not so much to the concept,though it is a new one,as to the method whereby grants are divided into those that create capital assets and those that do not.

For example,who knows how much of capital assets MGNREGS leads to. It is a fair point to argue that revenue/capital and Plan/non-Plan distinctions must go. But pending that,was such creative accounting really necessary? Budgets should become more transparent,not more translucent.