The Telegraph
Tuesday , February 18 , 2014
CIMA Gallary

Deep divide on deficit
PC against Pranab’s method

Mumbai, Feb. 17: Finance minister P. Chidambaram today took a dig at his predecessor, Pranab Mukherjee, when he said he wasn’t comfortable with the concept of an “effective revenue deficit” — a watered-down proxy target that was introduced four years ago to make it easier for the government to meet its goal of fiscal consolidation.

Mukherjee had introduced the idea first in the budget for 2010-11 and then bumped it up the following year to a fiscal parameter.

Under the terms of the Fiscal Responsibility and Budget Management (FRBM) Act of 2003, the government was supposed to completely eliminate the revenue deficit by March 31, 2009.

It never did.

Instead, Mukherjee introduced the new concept of an effective revenue deficit, which stripped out the so-called grants earmarked for the creation of capital assets from the reckoning. He also stretched the time schedule for the elimination of the reduced target by six years to March 31, 2015.

The net result was that Mukherjee was able to reduce his target by about 47 per cent in 2012-13.

In the Finance Bill 2012, Mukherjee re-phrased the goal as a commitment “to eliminate the effective revenue deficit by 31st March 2015, and thereafter build up adequate resource surplus and also to reach a revenue deficit of not more than 2 per cent of the gross domestic product by 31st of March 2015”.

Chidambaram told reporters today at a press conference after presenting his interim budget that he wasn’t happy with the manner in which departments and ministries were classifying a part of revenue spending as expenditure on the creation of capital assets. He felt there was no standardised method for such classification.

However, he said he had retained the parameter in his budget documents for the sake of continuity.

The 13th finance commission had also expressed deep misgivings about the classification of a portion of revenue expenditure as a capital grant and had expressly forbidden the government from doing so until there was a full and transparent debate on the subject.

Mukherjee had reclassified as capital expenditure money spent on welfare schemes such as MGNREGA, Pradhan Mantri Gram Sadak Yojana and Indira Awas Yojana. Between 93 per cent to 110 per cent of the expenditure on these schemes was treated as grants in the budget. The government argued that the long-term benefits of these schemes made them eligible to be treated as capital assets.

But the 13th finance commission, which defines the financial relations between the Centre and the states, had earlier rejected re-categorisation of revenue expenditure for health and education.

Mukherjee’s gambit of reclassifying expenditure on social welfare schemes as grants was never placed before the finance commission.

During its elaborate discussions with the 13th finance commission headed by former bureaucrat Vijay Kelkar, the government had made a strong pitch for re-classification of a portion of revenue spending as capital expenditure without success.

The finance commission, which submitted its report in December 2009, by when Mukherjee had already taken charge of the finance ministry, had slammed the ploy.

It 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. Any disturbance of this classification has wide-ranging implications for the finances of both the Union and the states.... it is not possible to accept the suggestion ...about reclassifying some portions of revenue expenditure as capital expenditure. It would thus be appropriate to continue with the existing classification of expenditure as ‘revenue’ or ‘capital’.”

The interim budget for 2014-15 projects revenue deficit at Rs 3,82,923 crore or 3 per cent of GDP. The effective revenue deficit for the next fiscal has been estimated at Rs 2,36,342 crore or 1.8 per cent of GDP.