How the finance ministry makes the math work for the two sharp cuts in the fiscal deficit planned for this fiscal and the next will get top billing among all budget news on February 28. Compared to this exercise, individual tax measures or allocations for programmes will figure far lower as points of interest for investors both in domestic and in foreign markets.
The scale of cuts is the largest any finance minister has ordered in the past 15 years in the Indian budget-making process. The two ways this can be done are either through a large hike in the tax base or rates in one of the five major tax streams, or through salami chops on expenditure programmes. Both will be used to some extent, but they will still fall short of producing the numbers the finance ministry will need to come up with to show a 5.3% and a 4.8% of GDP estimate for the fiscal deficit in this and the next fiscal.
Yet this will be possible and the reason for this is that the government’s financial statement is far deeply nuanced than the reading of the budget documents usually makes out. Unfortunately, the rest of this piece will be number-heavy because of the topic involved but that is unavoidable.
As an example, in the budget for 2011-12, the government had assumed a rise in capital formation of 21% in the gross capital formation (see table). The aggregate figure at R82,931 crore seemed healthy, but in the revised estimate for budget 2012-13, the number had been sheared to Rs 70,050 crore. The estimated gross capital formation in the current fiscal by the government is R94,906 crore.
This means even if the revised estimate for this fiscal comes in lower, just crawling up beyond R70,050 crore, for the next fiscal it can yield a growth rate of 20% or thereabout, but be moderate in absolute terms so as not to upset the fiscal balance.
Remember, the gross capital formation netted out for replacement expenditure is the basis for calculating the borrowing needs of the Centre. Net capital formation added to the net dis-savings by the government makes up its income deficit—the drag by the government on the savings of the rest of the economy. How did these numbers play out in the last three years?
We will return to this later, but for now just check out, for instance, the claimed total expenditure on