The government is worried about the revenue deficit. While the fiscal deficit projected for FY11 in the Union Budget is within the limits prescribed by the 13th Finance Commission, the revenue deficit is not. This is a serious issue, as the revenue deficit is the best measure of the quality of the deficit.

Borrowing to fund capital expenditure may be justified as assets will be created. But borrowing to fund revenue expenditure shows the government is not living within its means. That is why the government is thinking of altering the classification of revenue expenditure so that social expenditure programmes that create assets such as rural roads are classified as capital expenditure.

There’s some excuse for that, because though grants to states may be used for capital expenditure, it’s still classified as a revenue expense in the books of the Centre because the state and not the Centre owns those assets. The 13th Finance Commission has urged a relook at this provision. But here’s what the commission also said: “The existing classification of revenue and capital expenditure cannot be disturbed in an ad hoc manner. It has to be the result of a comprehensive study." Ideally, such a study needs to be undertaken by an impartial body and not the finance ministry.

But the government should also desist from classifying one-off receipts as revenue receipts. That is precisely what they have done with the proceeds from the auction of telecom spectrum, points out Hemindra Hazari, head of research at Karvy Stock Broking Ltd. Hazari says that the Budget “has classified receipts from the 3G & WiMAX telecom spectrum auction as a non-tax revenue receipt instead of as a capital receipt. On account of this classification, the revenue deficit for FY2011 Budget estimates should be higher by 0.5% of GDP, from the stated 4% to 4.5% of GDP."

The other grey area is disinvestment receipts from selling off stakes in companies such as NMDC Ltd, which are essentially being subscribed to by government bodies such as Life Insurance Corp. of India. Though all that is happening is a transfer of resources from one government pocket to another, it will show up in its books as a reduction of the fiscal deficit. Says Hazari: “The obsession by the government in reporting lower revenue deficit results in such types of accounting and even after such measures are adopted it apparently wants to classify parts of revenue expenditure as capital expenditure even though such expenditure may be regular maintenance expenditure."

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