In the beginning there was fiscal prudence and now it is Make Hay while the Sun Shines! Rather late in the day though and we are now moving closer to sunset. We have a Kingfisher inspired Govt. that borrows to the hilt until it has to sell the family silver to meet day to day expenses.
Right at the start of Mr. Chidambaram’s speech, we had his epic confession of incompetence of the UPA. Here’s what he says: –
“At present, the economic space is constrained because of a high fiscal deficit; reliance on foreign inflows to finance the current account deficit….”
“The CAD continues to be high mainly because of our excessive dependence on oil imports, the high volume of coal imports, our passion for gold, and the slowdown in exports…”
And that portion in bold type is where we are so screwed! How does this escape these worthies who spend hours analysing the budget and try to tell us the impact, when the reason stares you in the face? There are coal mines allotted to so many worthies such as the Jindals. These coal reserves have been left as it is and we are importing coal! Chidu blaming gold for our CAD, is rich! And the slowdown of exports, that has more to do with an overvalued Rupee. But, that is the subject of another blogpost. Let me recollect that the Current Account was in surplus for a long time till NDA was in power and inflation also was well in control. Please see the full comparison here. Also, let us hark back to the article I wrote at the time of the last budget. I had then listed out all the income and expenses of the Government. Finally all this expenditure is financed through either printing more currency or by borrowing and paying back through currency that has lost value and continues to do so.
This year Mr Chidambaram has gone one better than Pranabda. At least Pranabda was honest enough to spell out where the money would come from, how much would come from taxes and how much would be borrowed. Smartly, Chidambaram has quietly skipped the hard part of where the money is going to come from. He has merely stated that the taxes proposed will bring an additional amount of 18,000 crores. Okaaay, so what about the small matter of 16,65,297 crores, forming total expenditure. I searched long and hard at the budget speech to see where else the money would come from and I saw somewhere the proposal to raise tax free bonds of Rs 50,000 crores. So we still have close to Rs 16,00,000 crores which have to come from somewhere. Chidambaram now smartly skips addressing this 800 pound Gorilla and contents himself with feeding the birds, talking of Nirbhaya fund, Women’s Bank and Gender Fund etc. Ah ha, I found one more line which talks of Tax to GDP of 9.9%. So presuming the same rate of collection continues, we have a figure of approximately Rs 8,59,220 crores based on a GDP of 2011 estimated by the World Bank at 1.5 trillion USD, factoring a growth of 5.2% and converting this to Rupees at 55. This is still less than 10,00,000 crores and that still leaves a gap of 6,65,297 crores. Chidambaram, in his speech, cleverly and completely obfuscated the amount of revenue and kept concentrating on how he plans to distribute money. And we have the opposition, one of which parties I support, and now I wonder why! Not a peep from them. Not a question on where the money is going to come from. But then I did say this in my article, “What then of the BJP who will vote for this budget after making a few token changes.” Such a pity that bright people like Nirmala Seetharaman and Meenakshi Lekhi are not MPs. They would have pounced on Chidambaram and the Congress and reduced them to blubber.
But that is not to be. So let us content ourselves with the kind of analysis that idiotic columnists come up with, mentioning what some stupid tax proposal will have on which industry and what will benefit whom. Some of them even go into raptures talking of how people will save tax by the additional amounts of rebate given by Chidu for homes purchased in 2013-2014 for upto Rs 25 lacs. Try getting a small 2BHK in Bengaluru for Rs 25 lacs. And remember, this rebate is for one year only. Should be classified as #EpicFail .
Here then is the bottomline. We have expenditure of Rs 16, 65, 297 crores and sources of roughly Rs 11,55,000 crores, after factoring in the amount of non tax revenue estimated for last year (mostly one time, but I have given the benefit of the doubt to the Govt). We now are left with a hole of Rs 5,10,000 crores. That will come from more borrowing . Our esteemed FM talks of a fiscal deficit of just 4.8%. To me, it is a real deficit of Rs 5,60,000 crores and as a percentage of the total expenditure it is 31%.
That is on the revenue side. This government creates holes on the expenditure side, budgeting nothing for the Aadhar and for the Cash Transfer scheme. So we have to pay an interest of roughly 10% on borrowings of Rs 510,000 crores. That, my esteemed reader, is Rs 51,000 crores. And Chidu’s extra taxes will raise just Rs 18,000 crores. So we will end up paying additional taxes of Rs 33,000 crores just to pay for the interest on loans to be raised by the Govt. This is the known fiscal deficit. What of the holes caused by Aadhar and Direct Benefit Transfer Scheme. This is an unknown commodity and my guess is that this will cause a deficit of another 200,000 crores at least. The total interest bill will be Rs71, 000 crores as per my estimate. One more hole next year, a bigger one and we pay more. Incidentally, the Govt projects a GDP growth of 6% and expects a growth in revenues of 21% (http://www.firstpost.com/economy/why-the-foreigners-are-not-impressed-with-budget-2013-645164.html )
One of the principles I learnt in banking was of how one must never use short term funds for long term purposes, e.g. working capital used to buy stock in trade must never be used for buying say machinery or a building. In the case of your domestic expenses, it is the opposite. You do not use long term savings to finance short term expenditure. For instance do you break your FDs or take a loan against them for financing your day to day expenditure? Mostly, No. Emergencies are different. There you may need to do so. In the case of enterprises like the Government, handling of expenses is exactly like that of a home. We can see above that we are going to borrow to meet current expenditure. This is a recipe for disaster and we are now heading towards the proverbial cliff like lemmings.
Effectively, therefore we stand to get screwed by a profligate Govt and an FM who does not even bother to state in his budget speech estimated revenues, estimated expenditure and the deficit in real terms as well as how he expects to bridge the gap. To my mind there are ways to do so, but this would mean taxing everyone who can pay and do not. That is the subject of another post. To conclude this post, I really am cut up with the main opposition who do not bother to question the government at all. But we can only bemoan our fate and wait for the elections next year and vote out this corrupt thing that is called a Government, if you can have one that is shorn of Governance!