To meet fiscal deficit, Chidu does an Enron, junking all accounting principles

P-CHIDAMBARAMVivek Kaul  

The Mint newspaper has a very interesting article today on the finance minister’s P Chidambaram’s latest move to use the Reserve Bank of India(RBI) to help meet the fiscal deficit target of 4.8% of the GDP, set at the beginning of this financial year. Fiscal deficit is the difference between what a government earns and what it spends.
As per this plan the finance ministry is talking to the RBI for an interim payment or transfer of the central bank’s income. The RBI follows an accounting year of July to June. Given that, it usually transfers its income to the central government in August every year. Last year, the central bank had handed over Rs 33,100 crore to the government and the year before last, it had handed over Rs 16,100 crore.
But the government does not want to wait till August this year. It wants the central bank to pay up immediately, in order to contain the burgeoning fiscal deficit. The trouble is that the RBI Act does not h
ave a provision for transferring surplus before the accounting year ends.
The government is desperate for any revenue irrespective of where it comes from. The fiscal deficit for the nine month period between April and December 2013, stood at Rs 
5,16,390 crore or 95.2% of the annual target of Rs 5,42,499 crore (or 4.8% of the GDP as estimated in the budget presented in February 2013).
For the first nine months of the financial year, the government has run an average fiscal deficit of Rs 57,377 crore (Rs 5,16,390 crore/12). But for the remaining three months, it has very little room.If the government has to match the numbers projected in the budget presented in February 2013, over the next three months it can run a fiscal deficit of only around Rs 26,109 crore (Rs 5,42,499 crore – Rs 5,16,390 crore). This means an average fiscal deficit of Rs 8,703 crore per month, which is a whopping 85% lower than the average fiscal deficit per month that the government has run between April and December 2013.
One way of controlling the fiscal deficit is slashing expenditure. This is not very easy to do given that salaries need to be paid, employee provident fund needs to be deposited, interest on government debt needs to be paid and the government debt maturing needs to be repaid.
But one trick that the finance ministry has come up with on this front is to postpone a lot of payments to the next financial year. An article in the Business Standard estimates that subsidies of around Rs 1,23,000 crore will be postponed to the next financial year. These are subsidies on oil, food and fertilizer which should have been paid up by the government in this financial year, but will be postponed to the next financial year. The article points out that the government will need Rs 1,45,000 crore to pay up all the subsidies but is likely to sanction only around Rs 22,000 crore. This leaves a gap of Rs 1,23,000 crore which will be postponed to the next financial year, and will become a huge headache for the next government.
This essentially means that the government will not recognise expenditure when it incurs it, but only when it pays for that expenditure. This goes against the basic accounting principles, where an expenditure needs to be recognised during the period it is incurred. If a private company where to do such a thing it would be accused of fraud. Interestingly, even last year a lot of subsidy payments had been postponed. The American company Enron used this strategy for years to over- declare profits. It used to recognise revenue expected from the future years without recognising the expenditure expected against that revenue, and thus over-declare its profit.
That’s how things stack up for the government on the expenditure side. On the income side, the government is indulging in massive asset stripping. Since January 2014, public sector banks have announced interim dividends of Rs 27,474.4 crore. Now what is the logic here? Earlier this year, the government had put in Rs 14,000 crore of fresh capital in these banks. So, the government gives ‘x’ rupees to public sector banks and then takes away 2’x’ rupees from them.
Then there is the very interesting case of the Oil India Ltd and ONGC buying shares in Indian Oil Corporation worth Rs 5,000 crore, a company which is expected to lose around Rs 75,000 crore this year. Hence, no investor in his right mind would have bought stock in this company.
Given that all these companies are owned by the government, this is essentially a complicated manoeuvre of moving cash from the books of these companies to the books of the government. The next time any UPA politician talks about corporate governance, the example of IOC should be brought to his notice.
And then there is Coal India Ltd. The world’s largest coal producer declared a record dividend in January. This dividend aggregated to Rs 18,317.5 crore. Of this, the government will get Rs 16,485 crore, given that it owns 90% of the company. The government will also get Rs 3,100 crore, which Coal India will have to pay as dividend distribution tax. This money should actually have been used by Coal India to develop more coal mines so that India does not have to import coal, like it currently does, despite having massive coal reserves. But that of course, hasn’t happened.
Also, there is another basic issue here. The sale of assets from the balance sheet to meet current expenditure is not a great practice to follow, given that assets once sold cannot be re-sold, but the expenditure will have to be incurred every year. Asset sales cannot be a permanent source of revenue.
The UPA government has brought India to a brink of a financial disaster. The next government which will take over after the Lok Sabha elections later this year, will have a huge financial hole to fill. As the old Hindi film dialogue goes “
hum to doobenge sanam, tumko bhi le doobenge (I will drown for sure, but I will ensure that you drown as well).” The UPA clearly has worked along those lines.

The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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