The salience of Budget numbers lies in their credibility. Express Illustration by CR Sasi Kumar. The salience of Budget numbers lies in their credibility. Express Illustration by CR Sasi Kumar.

In the first part of this series on the Union Budget, we explained how the nominal Gross Domestic Product (which is the market value of all goods and services produced within the domestic boundaries of India) is the key number that determines the shape and form of the Union Budget.

In short, the nominal GDP for the current year is used by the government to first arrive at the likely nominal GDP for the next financial year (that is, the year for which the Budget is being presented). On the basis of the next year’s likely nominal GDP, the government then calculates the maximum amount of fiscal deficit (or the money that the government can borrow from the market) it can have if it has to honour the FRBM Act. After this the government calculates the revenues it is likely to get and, finally, decides on the total expenditure it wants to make given the constraints of the maximum fiscal deficit allowable and the revenues that are likely to be available with it in the coming year.

But over the past few years, many have questioned the government’s fiscal marksmanship.

What is fiscal marksmanship?

Fiscal marksmanship essentially refers to the accuracy of the government’s forecast of fiscal parameters such as revenues, expenditures and deficits etc. In other words, if the difference between what the government projected as the likely tax revenues in the Budget and the actual figures a year later is large then it reflects poor fiscal marksmanship.

In the Indian context, this term gained popularity after Raghuram Rajan, then India’s Chief Economic Advisor, stressed on fiscal marksmanship in the Economic Survey for the year 2012-13. He had defined fiscal marksmanship as “the difference between actual outcomes and budgetary estimates as a proportion of GDP”.

Why does fiscal marksmanship matter?

The salience of Budget numbers lies in their credibility.

The central purpose of publicly disclosing the Budget or the annual financial statement in a democracy and seeking approval from the legislature is to make the policymaking and governance transparent and participatory.

Explaining the Budget, Part 1: How the Union Budget is prepared

Everyone knows that Budget numbers are forecasts and estimates, and as such, unlikely to tally exactly with the actual numbers a year later, but there is underlying belief among people that when the government states, say, that its revenues will grow by 12% or that its fiscal deficit will remain within the FRBM Act’s mandate, it is based on genuine calculations.

However, if these fiscal forecasts turn out to be way off the mark repeatedly, it will undermine the credibility of the Budget numbers and indeed the Budget presentation itself.

Why is India’s fiscal marksmanship being questioned?

Typically, the fiscal marksmanship tends to get dented every time the economy faces a bump during the financial year. For instance, as a result of the extent of the Global Financial Crisis in 2008, budget forecasts in the ensuing years did take a hit.

The latest trigger has been the wide discrepancy between what the last couple of budgets — first the interim budget for 2019-20 (presented in February 2019) and then the full budget for 2019-20 (presented in July 2019) — expected the nominal GDP growth to be in 2019-20 and what the First Advance Estimates (FAE), released by the Ministry of Statistics and Programme Implementation in January 2020, suggest.

For instance, the July 2019 Budget expected nominal GDP to grow by 12% in 2019-20 (the highest level since the 13% growth witnessed in FY14) but the FAE expect the nominal GDP to grow by just 7.5% (which by the way is a 42-year low).

Since all budget calculations are based on the nominal GDP, it is expected that this wide variance in nominal GDP will reflect across the board in the coming Budget. For instance, the government’s revenues are unlikely to grow anywhere close to the last Budget’s expectation. Indeed, the revenue shortfall is expected to be anywhere between Rs 2 lakh crore to Rs 5 lakh crore. As a result, either the fiscal deficit will overshoot from the budgeted number or the expenditure numbers will be much lower than promised.

Explaining the Budget, Part 2 | What ails the credibility of India’s Budget numbers

Why has fiscal marksmanship worsened?

As mentioned earlier, when an economy’s growth slows down (or picks up) sharply within a year, it is possible that the fiscal forecasts for that year go down (or up) substantially. However, such changes do not happen too often.

In the recent past, however, there is one structural change that appears to be contributing to poor fiscal forecasts by the government. This structural change was the government’s decision in January 2017 to advance the presentation of the Union Budget by a whole month. Accordingly, the Union Budget for 2017-18 was presented on February 1 instead of the last working day of February (28th or 29th), as was the norm till then.

On the face of it, the government’s reasoning was well-intentioned; by advancing the whole process by a month, the government wanted to ensure that all line ministries had the funds at the start of the next financial year (that is, by April 1).

But in order to present the Budget on February 1, the whole Budget-making process was advanced by a month. It meant that the First Advance Estimates, which used to come by January end (after taking into account the economic activity of the first three quarters of the financial year), had to be brought out by the start of January. This, in turn, essentially meant that the estimate of the key nominal GDP data for the current year — on the base of which next year’s nominal GDP and other estimates were to be made — had to be made using just the first 6-7 months (or the first two quarters) of the current financial year.

In other words, when the government presented the Budget for the next financial year on February 1, its growth estimates for the current financial year were based on just half the year’s growth. Worse, these incomplete estimates were then used to project the next financial year’s economic growth etc.

Explaining the Budget, Part 3: Is the push towards organised manufacturing the answer to India’s jobs crisis?

N R Bhanumurthy, Professor at the National Institute of Public Finance and Policy (NIPFP), says this is exactly why things went wrong when the government presented the Interim Budget for 2019-20 on February 1, 2019.

”The slowdown in the Indian economy intensified in the third quarter (October to December) of 2018-19. But since the Interim Budget used growth data that pertained largely to the first two quarters (that is, April to June and July to September), the government believed that the nominal GDP in 2019-20 would grow at close to 12% when in reality it is expected to grow at less than 8%”.

Why didn’t the government course-correct and project slower economic growth in July 2019 when it presented the full Budget for 2019-20?

It is unclear why this was not done. But could be two or three possible reasons. One, the FM may have favoured continuity over the Interim Budget estimates instead of providing a starkly different set of estimates. Two, and a related reason, could be that the government did not have enough time to make the adjustment because it may have required redoing the whole Budget afresh. Or third, because perhaps the government did not recognise the severity of the economic slowdown that has been underway.

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