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Saturday, 2 March 2013

Union Budget 2013: 8 ways in which FMs fudge numbers

Union Budget 2013: 8 ways in which FMs fudge numbers

Budget 2013-14 will be a "responsible" budget, P Chidambaram has promised us.
 
The problem is, one can figure out how "responsible" a budget is only after one gets to see the fine print, and that too possibly only after some time has lapsed. Around mid-year is when the stuff hits the fan.
 
This is because the entire business of budgetary projections is done with smoke and mirrors. You assume this and you presume that. You look into the rearview and predict the future. If there is no rearview available, you hypothesise – even fantasise – about a rosy future.
 
In essence, most finance ministers can project anything and there is at least some chance (usually, one in 10) that they are right. But there is more of a chance that they are wrong.
 
Here is a partial check-list of how FMs can fudge their books and make their budgets look better than they are in terms of fiscal deficit, revenue growth, subsidies, etc.
 
First, any deficit number is a function of both the numerator and the denominator. The fiscal deficit figure of 5.3 percent of GDP that Chidambaram has promised to meet will be met by tinkering with the numerator: cutting unspent expenditure.
 
The reason why the ministry has been miffed with the Central Statistical Office's 5 percent GDP projection for 2012-13 is that it now has to work with a smaller denominator. It's tougher to fudge what has already happened.
 
However, at the stage of projecting the next year's deficit number, the FM has wider options, since both the numerator and denominator are unknown. To project a lower deficit, he can presume a higher GDP number or lower subsidies or whatever.
 
Second, inflation can be a big help. If inflation artificially inflates the GDP number, it helps increase the denominator (the GDP). Inflation also pushes people into higher tax brackets and increases tax revenues. A higher GDP assumption enables the FM to project increased revenue collection, which helps shrink the deficit. At the start of the year, no one can challenge these assumptions.
 
Third, there are ways to hide expenses. The classic case is the oil subsidy. Till Pranab Mukherjee became FM, oil subsidies were paid by giving oil companies bonds of an equivalent amount. These bonds bloated the government's debt, but did not show up on the expenditure side of the budget. Hence, a fictitious lower subsidy bill and deficit.
 
Fourth, expenses can be shifted to someone else's books, too. Once again, the oil exploration companies are the best examples. The finance ministry does not bear the full extent of the subsidy on fuel even today, after years of fudge; it is shared upto 40 percent by the likes of ONGC, Oil India and Gail. The exchequer's oil subsidy bill is thus only 60 percent of the real figure.
 
Fifth, expenses can be shifted to the next year. This is what Chidambaram is most likely to do in his budget, since he has to cut the fiscal deficit to 4.8 percent in 2013-14. He can underprovide for food subsidies in the budget despite announcing a Food Security Bill. He will provide a limited amount and tell parliament that he will provide more if needed. The government may actually spend more as election approaches, but by then the focus will not be on the budget deficit, but the seat deficit.
 
Pranab Mukherjee left last year's oil subsidies unpaid till this year, and Chidambaram is struggling to hide the figures even now.
 
Sixth, optimistic assumptions about the value of the rupee or crude oil can help. If crude oil or imported fertiliser prices are assumed to be 10-15 percent less over the next year, either because of a higher rupee value or lower global price, the subsidy bill will automatically be lower.
 
Seventh, FMs can lean on public sector companies to bail them out. Last year, Mukherjee showed higher earnings from selling ONGC shares, but this came largely from LIC's pockets. The fiscal deficit was thus financed by arm-twisting LIC to buy shares. This is not to say LIC wouldn't have bought the shares anyway, but the FM was helped by LIC's purchases to show a lower deficit. But what has effectively happened is that money has been transferred money from one pocket of government to another.
 
A related method is to force public sector companies to fork out more dividends. But this can work only in one year or two. No company can pay huge dividends unless it has no further investment plans.
 
Eighth, and this is the neatest and easiest trick. Even after giving away concessions, FMs can claim that their revenues will not fall (or even rise) since they plan to improve "tax compliance". That is, catch more tax evaders or get more people to pay.
 
Finance ministers may have even more tricks up their sleeves, but these are some of the ones most frequently used. So don't be fooled by any number Chidambaram throws at you in the budget.

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