New Delhi: To support its claim of being committed to fiscal rectitude, the Congress-led United Progressive Alliance (UPA) will, later this month, place in Parliament documents to show that the revenue deficit, a key measure of fiscal excess, has been overstated because of accounting classification.

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This is because some items classified as revenue expenditure actually go towards capital creation.

Correcting this impression, the government believes, is important as it will improve prospects of India receiving a more favourable sovereign rating which, in turn, would mean Indian companies can raise foreign debt at lower interest rates and add momentum to the ongoing economic recovery.

Revenue deficit is a measure of the excess of current consumption over current revenue, while fiscal deficit is the excess of total expenditure over revenue, that is bridged by borrowing.

“Sovereign rating is one of the parameters by which creditworthiness of a corporate borrower is assessed," said macroeconomic expert Renu Kohli, who was earlier with the Reserve Bank of India and the International Monetary Fund.

Graphics: Yogesh Kumar/Mint

Prior to the Budget announced on 26 February, the finance ministry ordered other ministries to start highlighting the end-use of their spending. For instance, if the end-use would result in creation of infrastructure, it would have to be highlighted in the detailed demand for grants, two officials familiar with the development, said.

The detailed demand for grants would be tabled in the Lok Sabha later in the session when Parliament votes on the Budget’s expenditure proposals.

The ministry’s order is expected to counter doubts which might arise on the UPA’s commitment to fiscal consolidation as recommended by the 13th Finance Commission (TFC).

The medium-term fiscal plan presented on 26 February showed that the government would overshoot the revenue deficit milestones prescribed by TFC over the next three years, while it would simultaneously better the milestones on fiscal deficit and debt stock.

TFC suggested that the government eliminate revenue deficit in four years, with annual milestones. The government’s medium-term plan said it would be unable to meet annual milestones for revenue deficit till March 2013; the plan’s projections end that year.

According to the two officials, the revenue deficit milestones will not be met due to accounting classification issues and not the lack of desire to push through fiscal consolidation.

The order to introduce classifications in the detailed demand for grants are to make sure any one reading the budget documents understands why there is an overrun on revenue?deficit?the?officials?added.

There is some background to the finance ministry’s desire to improve its communication on deficits and debt stock.

Soon after the July 2009 Union budget, international credit rating agencies such as Standard and Poor’s were given a presentation in the finance ministry on the assumptions underlying the budget proposals.

During the discussions that followed, both sides were unable to agree on a common number for a key measure as India’s debt stock. On account of inadequate clarity, government officials felt rating agencies double count debt such as that raised through small savings schemes.

In the 2010-11 Budget, the document set the record straight by counting small savings only once.

Accounting issues are at the root of the dilemma over revenue deficit as spending on infrastructure such as building rural roads (Rs10,886 crore for 2010-11) are accounted as revenue expenditure, or expenditure on current consumption.

Ideally, this should be classified as capital expenditure as the spending is on infrastructure to catalyse the local economy and contribute to overall economic growth, the officials said.

But till such time the government reworks its accounting classification, it is necessary to clearly explain the spending pattern, they added.

The end-use details of spending might influence rating agencies. Fitch, for example, announced last month that it would stick to a negative outlook on India’s long-term domestic currency rating as structural issues affect its public finances.

The structural issues are typically sudden spurts in current consumption, which occur at intervals. The UPA’s fiscal plan said it would reprioritize spending to enhance the level of public investment, a pattern which was also suggested by TFC.

The government’s responsiveness to TFC’s suggestions are critical to the way a rating agency such as Fitch would judge the seriousness of the move towards fiscal consolidation.