24/02/2015 3:52 PM IST | Updated 15/07/2016 8:25 AM IST

Jaitley Needs To Do This One Thing For His Budget To Be Credible

Jaitley should ensure that the numbers that he projects need to be credible. That should be the basic goal of the budget. As long as Jaitley sticks to it, everything else can fall into place, during the course of the next financial year.

PRAKASH SINGH via Getty Images
Indian Finance Minister Arun Jaitley (C) walks with party officials and Members of Parliament after a Bharatiya Janata Party (BJP) Parliamentary Board meeting at Parliament House in New Delhi on February 24, 2015. AFP PHOTO/ PRAKASH SINGH (Photo credit should read PRAKASH SINGH/AFP/Getty Images)

Finance minister Arun Jaitley will be presenting the second budget of the Narendra Modi government on February 28, 2015 (i.e. this Saturday). Until he gets up to make the budget speech, suggestions will be made regarding what he should and what he should not do in the budget.

The irony of course is that the budget has already been made (given that it is in the process of being printed) and there is nothing that Jaitley can do to incorporate these suggestions that are being made.

Various suggestions have been made on what Jaitley should do in this budget. Some economists and analysts want Jaitley to increase public investment given that the private sector is not doing well. They have suggested that the finance minister should not worry about the fiscal deficit this year. Fiscal deficit is the difference between what a government earns and what it spends.

Some others have suggested that Jaitley needs to create jobs. Still others have suggested that Jaitley needs to overhaul the tax system and so on. The number of suggestions being made are directly proportional to the number of people making them.

Nevertheless, it is worth reminding here that the budget is the annual financial statement of the government. And first and foremost Jaitley should ensure that the numbers that he projects (basically the expenditure and the revenue of the government) need to be credible. That should be the basic goal of the budget. As long as Jaitley sticks to it, everything else can fall into place, during the course of the next financial year.

Jaitley and P. Chidambaram before him have done a bad job of projecting numbers. They have made extremely optimistic assumptions regarding revenue growth, only to see them fall apart during the course of the year.

Let's look at Chidambaram first. In the financial year 2013-2014(the period between April 1, 2013 and March 31, 2014), Chidambaram projected that tax revenues will grow by 19.1% to Rs 8,84,078 crore. They finally grew by only 12.7% to Rs 8,36,026 crore.

Chidambaram managed to balance the numbers by postponing recognizing some expenditure the government had already incurred, to the next financial year (leaving a headache for Jaitley). He also had to slash the plan-expenditure of the government. The government expenditure is categorised into two kinds--plan and non-plan. Plan-expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. In short, it is asset-creating expenditure.

In 2013-2014, Chidambaram slashed plan-expenditure by 14.36% to Rs 4,75,532 crore. He had followed a similar strategy even in 2012-2013(the period between April 1, 2012 and March 31, 2013) when he slashed the plan expenditure by 17.6% to Rs 4,29,187 crore, to balance the budget. Jaitley did a 'Chidambaram' when he presented the budget in July 2014. He assumed that tax revenues will grow by 16.9% to Rs 9,77,258 crore during this financial year. This has turned out to be an extremely optimistic assumption.

As per the Mid Year Economic Analysis released by the ministry of finance on December 19, 2014, the government has overestimated the tax revenues this financial year to the extent of Rs 1,05,084 crore. This is visible in the indirect tax collections for the first ten months of this financial year between April 2014 and January 2015. They grew by 7.4%. Jaitley's budget had projected a growth of 20.3%. This will create a huge gap.

In order, to meet the fiscal deficit target of 4.1% of the GDP set in July, the Modi government like the UPA government before it will have to slash its plan-expenditure. Data from the Comptroller General of Accounts shows that during the period April to December 2014, plan-expenditure stood at Rs 3,52,631 crore, or 61.3% of the annual target.

Governments, over the last few years, have held back plan-expenditure so that they can slash it during the last few months of the year, in order to balance the budget. Jaitley will do the same this time around. This is clearly not a healthy trend and needs to stop. Budget, as I said earlier, is the annual financial statement of the government and the numbers it projects need to be 'realistic' and 'credible'. Jaitley has been lucky that oil prices have fallen big time during the course of this financial year. If that had not happened, his projected numbers would have gone for a toss totally.

Long story short--this time around Jaitley's numbers need to be credible, else there won't be any difference between him and Chidambaram. And that is a comparison that the finance minister would clearly want to avoid.