Money Sep 28, 2012
By R Jagannathan
Even as Vijay Kelkar, the man mandated by the finance minister to chalk out a fiscal consolidation plan for the government, has been muttering darkly about the budget getting all its sums wrong, the Secretary in the department of economic affairs, Arvind Mayaram, has managed to deliver what will prove to be another piece of fiction: that the borrowing programme for the second half of 2012-13 will remain the same at Rs 2,00,000 crore.
How will he manage this miracle when Kelkar has pointed out that the budget has underprovided for subsidies of Rs 70,000 crore and overestimated revenues by Rs 60,000 crore - making for a Rs 1,30,000 crore chasm between the budget's arithmetic and reality?
Mayaram is quoted by Reuters as saying: "We will take more steps towards fiscal consolidation and efforts will be to keep fiscal deficit within budgeted target."
Fat chance. Barring an unexpected crash in international oil prices, or huge pickings from disinvestment (much more than the Rs 30,000 crore target) or a dramatic reduction in government expenditure, he is probably bluffing.
There is not a snowball's chance in hell that the government can keep it borrowing under Rs 2,00,000 crore in the October-March period, when subsidies are bloating beyond recognition even after the Rs 5 hike in diesel prices.
In fact, Mayaram's claim is probably an attempt to lull the market into believing that the government is going to pull off a sensational last-ball sixer on the fiscal deficit front so that bond yields do not rise just when the government is passing the hat around.
Of the Rs 5,69,000 crore gross marketing borrowing programme for 2012-13, around Rs 3,70,000 crore got done in the first half, and only Rs 2,00,000 crore is left.
But this amount is simply not enough since the subsidies alone are expected to overshoot dramatically - in oil, food and fertiliser.
Firstpost has said before that the fiscal deficit - which is the gap between revenues and expenditure that the government tries to bridge through borrowings - is more likely to hit Rs 6,50,000-7,00,000 crore this year, up from Rs 5,13,590 crore marked in the budget papers. Kelkar's own back-of-the-envelope calculations put the figure at Rs 6,43,590 crore.
So what Mayaram is doing is probably bluffing, in the hope that bond yields - which indicate the cost of government borrowing - will stay reasonable for a while, and then hit the market for the balance when it is lulled into a false sense of comfort.
Ten-year bonds yields are currently around 8.15 percent, and Mayaram must be hoping that if it can be kept down till the Reserve Bank starts cutting rates around end-October, then the cost of the expanded borrowing can be kept low, too.
In other words, he is trying to pull wool over the market's eyes.
Rajeev Malik, Senior Economist at CLSA, calls it the great con trick. He says: "Don't fall for the trick to show that the fiscal deficit is on track. Essentially, the government is not ready to revise up the borrowing for 2H (second half) even though a recent government panel indicated that this year's fiscal deficit could exceed 6 percent of GDP...".
"Most likely, the government will announce additional borrowing later in the year. This additional borrowing will partly be absorbed by the RBI's open market operations (OMOs).... There is no revised official fiscal deficit forecast but a number around 5.3 percent of GDP is being bandied around. This appears rather ambitious - but that has never been an issue with the government."
In other words, the government is again fudging its numbers.