There is nothing unusual about the Union government making rosy assumptions. Be it the budget, tax collection targets and, in general, its ability to make good its promises. After the poor outcome of the 2G spectrum auction last week—where it ended with less than one-third of its target—its budgetary assumptions are now open to question. That is, if they were believable in the first place.
The poor outcome—from the government perspective—of the 2G auction is only one part of the problem. Its ambitious target to garner Rs40,000 crore from divestment—all in the next four months or so—is equally questionable. Together, these two items account for an expected Rs70,000 crore in non-tax revenue. This sum can now only be called a dream.
The weakness in this case lies in the mismatch between the expenditure and the revenue sides. The expenditure programme is firm, committed and certain. In any case, barring an unexpected cut (say from a big-ticket, defence-spending item), there is little headroom for effecting cuts. Hence, the great deal of certainty on this side. The revenue side is now dependent on the vagaries of the market—in sum, rather uncertain.
The 2012-13 budget had no provisions for taking stock of, and overcoming, uncertainties. In a very different context, Y.V. Reddy, former governor of the Reserve Bank of India (RBI), pointed out the dangers of not appreciating risks in formulating and implementing the 12th Five-Year Plan. While the time horizon for the two—the Plan and the budget—are different, the principles of appreciating risks and uncertainties (ignoring the difference between the two) are not divergent. In the instant case, the government, while making plenty of noise about the role of global factors in slowing growth, did not appreciate them sufficiently while preparing the budget. In both cases—the auction and divestment—there was lack of appreciation of factors such as appetite for bidding beyond a certain mark, the mismatch between setting a price band for a particular share offering and what investors are willing to fork out. These were risks that should have been factored at the start of the fiscal. It is utterly misleading to label them as unexpected events or—to use that abused expression—global factors.
It is hard to believe the government will learn from these episodes. But, for the sake of India’s credibility, its budgetary numbers—fiscal deficit, growth in tax collections and non-tax revenue, among others—should have some link with reality.
Are budgetary numbers believable any more?