Interim Budget 2014: A reflection on fiscal marksmanship

In the Economic Survey of 2012/13, a new term was introduced in the discourse of public finance in India: Fiscal Marksmanship. Fiscal marksmanship simply refers to the forecasting/projection accuracy in the budget making exercise. It is the difference between actual expenditure and budget estimates. The credit for this goes to Dr. Raghuram Rajan who analysed the fiscal marksmanship in the Economic Survey and brought further accountability on the part of the government.

The summary measure to assess the state of government finances is the fiscal and revenue deficit. However, we believe that assessing the key revenue and expenditure indicators as well is important to understanding the true extent of fiscal marksmanship.

In the interim budget of 2014/15, Finance Minister P. Chidambaram has stated: "In some years, we over-provide in the Budget. In those years savings are inevitable. Besides, if there is lower-than-expected growth there will be lower-than-estimated revenues as well. 2013/14 has been one such year. I am afraid, we will not be able to spend the budgeted plan expenditure, but non-plan expenditure will exceed the budget by a small amount." The issue related to fiscal marksmanship lies in this statement. The budget needs to be realistic, credible and achievable. If the budgeted numbers are significantly underestimated or overestimated, then the budgeting exercise loses its relevance. If the ministries/departments internalise these messages in letter and spirit, then the accountability to execute the budget may get diluted.

Just to drive home the point on fiscal marksmanship - we can see the announcement on plan expenditure in the budget of 2014/15. The revised plan expenditure of 2013/14 is Rs 79,791 crore lower (i.e. 15 per cent) than what had been budgeted. Now the question is whether the changes in the real side of the economy are so significant that the budgeted plan expenditure (a function of budgeted revenue, which in turn depends upon economic performance) could not be met. The real GDP growth in 2012/13 was 4.5 per cent as per the CSO's [Central Statistics Office] revised figure and the advance estimate for 2013/14 is 4.9 per cent. Even the nominal GDP grew at approximately the same rate in 2013/14 as it grew in the year before. If the economy performed better or at par than last fiscal year, then do we need to search for the answer of this deviation in plan expenditure elsewhere? Certainly the conjecture that 'lower than expected growth' results in lower expenditure does not hold in this case. The issue could be - the ability to execute the budget or the projections made in the budget itself.

Let us look at this fiscal marksmanship in a more disaggregated manner for the last five years. In the table, positive numbers indicate that the actual was higher than the budgeted and negative numbers show that actual realisation was less than the budgeted figure.

The deviation in the fiscal deficit varies from -4 per cent to +24 per cent (i.e. the difference between the actual and budgeted expressed as percentage). In 2011/12, the budgeted fiscal deficit was 4.6 per cent while the actual deficit turned out to be 5.7 per cent. If we take the absolute average deviation of the fiscal deficit in last five years, it is close to 10 per cent. The same story is repeated in the case of the revenue deficit as well. If we take the deviation in tax revenue, it is more muted than the deviation noticed in the case of the fiscal deficit. The deviation in tax revenue varies from -4 per cent to +7 per cent. However, non-tax revenue shows a larger variation from -3 per cent to +48 per cent. For example, in 2010/11, the actual non-tax revenue collection was significantly higher than what was budgeted at the beginning of the year. At least in four out of five years, the actual non-tax revenue realisation deviated from the budgeted figure by 10 percentage points or more.

On the expenditure side, the deviation of non-plan expenditure from the budget estimate is more muted as compared to plan expenditure. This is largely because non-plan expenditure is committed expenditure and can be projected on the basis of historical trend. In the case of plan expenditure, which is the more productive expenditure, starting with the year 2010/11, the deviation started increasing. It was two per cent in 2010/11, increased to seven per cent next year and was at its peak in 2012/13 as the shortfall was 21 per cent. In 2013/14, though the deviation has come down, it is still high.

When we look at the expenditure deviation in the case of key ministries, it suggests the budgeting exercise needs to be more scientific. For example, the Ministry of Power shows a large gap in what has been budgeted and what it could actually spend in each of the last five years. In some cases, the deviation is more than 50 per cent. Similarly, the Ministry of Rural Development shows a deviation of more than 20 per cent in the last two fiscal years. The Ministry of Agriculture presents a similar story where the deviation varies between -29 per cent to +48 per cent.

Now, the moot question is whether such shortfall in expenditure is due to 'lower-than-expected growth' or weaknesses in planning and execution. While there will be some deviation from budgeted numbers irrespective of which scientific method we adopt, such large deviation certainly calls for better planning and execution combined with a restraint on unrealistic populist projection of allocations and expenditure.

While governments can take credit by allocating higher resources to key sectors or ministries, what the budget does not reflect is that such proposed higher growth in expenditure is on the backdrop of failure to spend the full amount proposed in the last budget. To put it simply, the announcements in the budget on growth in expenditure is vis--vis revised estimates of the last fiscal year. More often than not the revised estimates are lower than what had been budgeted. Therefore, the announced growth in expenditure is on a lower base. For example, in 2013/14, the proposed increase in plan expenditure budget was to the extent of 29.4 per cent (Budget estimate of 2013/14 over revised estimate of 2012/13). However, if one compares the budget estimate of 2013/14 with the budget estimate of 2012/13, the increase in plan budget allocation was only 6.6 per cent.

There is a need for budget announcements to be more transparent in terms of explaining the reasons behind such unmet expenditure. It will be a good practice if one puts the growth in budgetary allocation not only with respect to revised estimates of the previous year but with respect to budget estimates of the previous year as well.