India’s fiscal mess

The Economic Times has a depressing story on the state of public finances in India:

…Expecting the fiscal deficit to come in at 4.1% of GDP for the whole of 2014-15 was widely predicted to be unrealistic, but the speed at which the gap between actual numbers and the projected figure has closed has exceeded earlier years. Last year, for instance, the fiscal deficit was around a third of the budgeted amount in the first two months of the year.

Essentially, what the government did was roll over, to the next year, payments which would have ideally come in towards the end of the previous financial year. The petroleum ministry, for instance, saw its expenditure for the first two months of this year coming in at 39% of its annual budget. In the same months of last year, the petroleum ministry had spent virtually nothing. Effectively what the government had done was delay payments of the fuel subsidy to oil companies till 2014-15. This way, it didn’t have to account for the expenditure in the previous year, resulting in a lower deficit. This way, it didn’t have to account for the expenditure in the previous year, resulting in a lower deficit. “The government left a number of expenditures uncovered,” points out Rajiv Kumar, senior fellow at the Centre for Policy Research.

Kumar points to the interesting fact that the fiscal deficit for the month of March last year was actually negative — in other words, the government received more funds into its coffers than was paid out of them for that month. “There was sharp fiscal compression in that month — more so than in earlier years,” he says, alluding to the fact that the government did not spend as much as it usually did.

March is an unusual month for government spending as the cement sector is well aware. Every March, cement consumption across the country spikes sharply. In recent years, that spike has been anywhere between 10% and 13%, but it’s followed in the subsequent month by a sharp fall. The spike is often because government departments would like to use up their budgets before the end of the financial year and binge on construction activity which was originally budgeted but failed to take off.

In contrast, in the early months of the new financial year, construction activity is slow as government budgets take time to be approved. Indeed government expenditure in March is regularly in excess of 15% of the budgeted amount for the year. In other months, the spending averages around 7-8%. In 2013 and 2014, though, the effect was more muted.

This, along with rolling over subsidy payments to the next year, helped the government push the fiscal deficit into negative territory. On the revenue side, dividend payments were sharply higher than originally budgeted for 2013-14 — by as much as 44%. “Notice also that the budgeted dividend payments by public sector undertakings [PSUs] for 2014-15 are much lower than earned in 2013-14,” says Sabnavis. Effectively the government asked PSUs to pay up higher amounts in dividends the previous financial year, with the sweetener that they wouldn’t be forced to do so again next year.

Then there is the tactic to give rosy estimates for the coming year, in order to give the markets and economists something to cheer about. Total subsidies for 2014-15 were pegged in the interim budget at just about 0.3% higher than the revised estimates for 2013-14. The government’s previous track record in managing subsidies gave little reason to believe this.

Last year, for instance, revised estimates were higher than their original budgeted amounts by 11%. Despite that experience, budget estimates were pegged at a lower level than a year before. At the same time, expectations of tax revenues are pegged at overly optimistic levels as well. All this means little fiscal room for Arun Jaitley when he presents his first budget next week.

India has enormous potential, but this story is yet another example of why India continues to fail to live up to her potential. I hope Premier Minister Narendra Modi’s new government will deliver on the promised reforms. Unfortunately given the historical experience it is hard to be optimistic.

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  1. samir sardana

     /  April 25, 2020

    India ?

    Banking and NPA doom,MUDRA doom,Fiscal Doom,COVID Doom – and it all started from the Demo doom

    indians raise juvenile and supine queries and objections on money laundering and Pakistan

    I present the largest money laundering operation in the world sponsored by a state

    The Hindoo Notebandi

    The Demo Scam – which no Indian Newspaper reported – as they were all paid off – as they are of the ilk of the Brahmins and Banias.dindooohindoo

    It is the disaster of the Brain of Narendra Modi !

    Part 1

    Conversion Route (Elementary Level – rest to be submitted at the CIC Hearing)

    • Party A has Rs 1 crore of Old Cash (which is obviously unaccounted) and the choice of paying tax and interest thereon has lapsed as there is no VDIS – and post Demo the deemed tax is 100% at the minimum
    • Party B (Stage 1 Converter) has Rs 65 lacs of New Cash – which is given to Party A in lieu of the Old Cash of Rs 1 crores which is then given to Party C to X as under:
    o Party C to X (Stage 2 Converter) are legal entities who trade in Nil VAT/ST products (or under Exemptions and /or Compounding) and are POS Retailers who then , make manual or backdated E-Bills for fictitious sales of items to unknown individuals and deposit the new cash into the bank
    o Party C to X deposit the cash in banks whose books are open for 30-45 days before the date of announcement of the Demo or whose IT systems allow backdating of E- Bank Statements (within the period of reporting to the RBI and other Regulators)
    • Party Z then taps Party A to convert the New cash Received of Rs 70 lacs into a capital entry to clean the cash at a rate of , say 15%, wiring Rs 59 Lacs to Party A, as a capital receipt etc, and taking the Rs 70 lacs of new cash from Party A
    • Party Z which is basically front for Party B – hands the cash to Party B, after charing the custodial, logistics and security charges
    • Party B then resumes the same chain as in Step 2 above, wherein the rate of the conversion, id.est., 30% keeps rising as the DEMO deadline appears
    • Party A can convert the Rs 50 lacs into cash – new and old – at a premium, at any time that it is required

    Notes

    • Since converters had the new cash within a day and as per news reports , even before the announcement of Demo, they have to be part of the establishment
    o If the converters had withdrawn the new notes from the bank, the banks would have tipped off the DRI/ED etc and possibly reported to the RBI – in which case they would be raided (but were not) or they would have to explain why large amounts of cash were withdrawn (for labour wages – although wages are not paid in Rs 2000 notes , agri payments etc) and on specific dates and how/why the banks were satisfied about the same
    o Hence, if the converters got the new cash o/s the Banking system – that is fraud and PROOF THAT THE CONVERTERS ARE PART OF THE ESTABLISHMENT
    o If the converters got the new cash from the banks – it is proof of collusion and fraud by the bankers, as past patterns of withdrawal by bank customers (for labour, wages, agri payments etc), would not support the new notes withdrawal
    • Since converters had TO TRANSPORT CASH ACROSS LOCATIONS, IT WOULD HAVE REQUIRED SECURITY OR PERHAPS STATE SECURITY, they have to be part of the establishment as
    o It is impossible that the state would not be aware of the logistics and security
    o It is impossible that the state would not raid the cash movement
    • Since Party C to X, who would have reported drastic increase in cash sales and deposit of cash into the bank , would not be able to support the same by PAST PATTERNS OF RAW MATERIAL PURCHASES AND TRADING PURCHASES AND SUCH LARGE AMOUNTS OF PURCHASES OF RAW MATERIALS IN CASH – COULD NOT HAVE BEEN JUSTIFIED BY PARTY C TO X , W/O THE SUPPORT OF THE ESTABLISHMENT

    • Cash recovered in the “form of old notes” by the “DRI/ED and the Police” – were all recovered from the “so called originators” and “so called garbage dumps”- w/o “a single case of cash recovered” from “the converters/entry operators”

    • No cash was recovered from the “converters/entry operators (Party B and Party C to X, as stated above)”, who are obviously part of the establishment – which is unusual , as the operators would be having the new currency which o Is either kept in a house/safe or o Stocked in the bank (which would have tipped off the DRI/ED etc or o Transferred the cash around in new stocking points and neither of the 2 above points can happen w/o the support of the establishment
    • Since the GDP is still growing on the “computation mode of GDP on expenditure mode”, and there is “no shortage of notes” of less than Rs 100,it would mean that the Industrial agglomerations typified by the SSI and the Cash sector,have been “able to convert the bank deposits”, back into cash – “obviating the purpose” of the notebandi (Rs 100 is assumed,as the wages are paid in that denomination

    Reply

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