Finally, the finance minister has accepted that fiscal and revenue deficits are being understated in the Budget. This is due to the oil, food and fertilizer bonds issued to companies. This questions the very foundations of having a programme to eliminate these deficits.
The full extent of this under-reporting, however, takes almost nine months after the end of the fiscal year to emerge. For the fiscal year 2006-07, it was only in December 2007 that it became clear there was a gap of Rs52,626 crore in the revenue deficit between what the government claimed it was and what the Comptroller and Auditor General of India (CAG) reported. The fiscal deficit gap was Rs40,361 crore. The CAG’s figure was 28% more than the government’s.
For the coming fiscal year, the Budget does not disclose the figure for bonds to be issued to oil marketing companies, fertilizer companies and the Food Corporation of India. Perhaps it’s unfair to demand an account of these now. But then it’s equally unfair for the government to project revenue deficit and fiscal deficit at 1% and 2.5% of the gross domestic product for 2008-09. Given its penchant to issue bonds and securities around the year, these values are meaningless.
The coming fiscal year may see major distortions in the picture painted by the Budget. For starters, it’s not clear how the government will pay the first tranche of the Rs60,000 crore it owes banks on account of farmers’ debt write-off. Will it issue bonds to these banks? Will these bonds be included in the deficit figures? It appears unlikely, as the finance minister has given no details. Further issuing of oil and fertilizer bonds cannot be ruled out.
In early December last year, the finance minister explained these differences to Parliament. He claimed the issuance of securities, bonds and write-offs was behind this gap. These, he said, were “non-cash” transactions that were “netted” against matching accounts and as a result were excluded from revenue and fiscal deficit calculations.
This does not conform to international best practice. The International Monetary Fund’s Government Finance Statistics Manual details these. The Budget does not adhere to them when it comes to deficit reporting. Moreover, as these deficits gallop, macroeconomic risks are likely to increase. They might catch the government napping in a moment of crisis.
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