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How Pranab squared the deficit hole by AK Bhattacharya
Just reclassified Rs 1.46 lakh crore of spending as capital investment.

Finance Minister Pranab Mukherjee’s Budget for 2011-12 seems to have used a new accounting system to make a virtue of necessity.

Committed to provide funds to run the Mahatma Gandhi National Rural Employment Guarantee Scheme or MGNREGS, Mukherjee has transferred the entire financial allocation for the scheme under a head that will now help him take credit for a reduced effective revenue deficit for 2011-12.

An estimated amount of Rs 39,974 crore is shown against MGNREGS as an expenditure item, which he now claims will create capital assets and, hence, should be deducted from the government’s total revenue expenditure to get a more correct estimate of the revenue deficit.

In other words, the government’s effective revenue deficit will decline by almost half a percentage point of gross domestic product (GDP) purely on this account. At the same time, the finance minister would have paid his obeisance to the Sonia Gandhi-led National Advisory Council’s recommendation that he provide adequate funds to run the rural job guarantee scheme. In 2010-11, the Budget classified the entire allocation for MGNREGS, almost the same amount allocated for the coming year, as revenue expenditure without creating capital assets.

Indeed, Mukherjee has classified a total expenditure of Rs 1,46,853 crore of the government’s total revenue expenditure of Rs 10,971,62 crore as grants that would be used to create capital assets. This classification has reduced the total effective revenue expenditure for the next year to Rs 9,50,309 crore. Thus, the reduced revenue expenditure exceeds the government’s revenue receipts of Rs 7,89,892 crore by an amount of Rs 1,60,417 crore, or 1.8 per cent of GDP.

This is what Mukherjee describes in his Budget for 2011-12 as the effective revenue deficit. At 1.8 per cent of GDP, this is well below the 2.3 per cent revenue deficit recommended by fiscal purists and, in particular, the Thirteenth Finance Commission.

If the reclassification is not done, the revenue deficit jumps up to Rs 3,07,270 crore or 3.4 per cent of GDP in 2011-12. Without the reclassification, Mukherjee shows no improvement on the revenue deficit front, which remains at 3.4 per cent for 2011-12.

For several years, the government has been classifying as revenue expenditure all its outlays that came under the broad heads of subsidies, defence (without the capital expenditure), pension and all other non-Plan expenditure.

However, last year, the finance ministry, under pressure from the 13th Finance Commission to abolish the revenue deficit by 2013-14, argued that a large chunk of the current revenue expenditure actually went towards creating capital assets.

More, such allocations went to states, which in turn classified these under their capital expenditure. The finance ministry’s argument was to redefine such revenue expenditure to exclude allocations used for creating capital assets while measuring the government’s revenue deficit. Revenue deficit is the excess of the government’s revenue expenditure over its revenue receipts. An internal committee in the finance ministry looked at this issue and recommended the change, which Mukherjee gladly accepted.

It is not just the MGNREGS funding that has helped the finance minister to bring down the effective revenue deficit through such an innovating accounts classification. There are several other flagship social sector schemes of the government where higher amounts have been shown as creating capital assets for next year. For instance, against Rs 5,036 crore in 2010-11, the amount being spent under Sarva Shiksha Abhiyan to create capital assets is going up to Rs 9,430 crore in 2011-12.

Similar increases have been provided for other schemes like the accelerated irrigation benefits programme, backward regions grant fund, submission on urban infrastructure and governance, the University Grants Commission and the new scheme for setting up 6,000 model schools at block levels.