Pranab struggles to do the math

Given the seemingly impossible task of splurging on populist giveaways and yet keeping the fisc in control, finance ministers have traditionally resorted to liberal doses of optimism in the revenue projections they make to balance the book.
Pranab Mukherjee had considerable scope for doing the same this year given the huge additional tax mop-up of Rs 41,400 crore, but appears to have chosen a different tack understating expenditure.
The tax revenue numbers suggest an increase of 19.5% in gross tax collections in 2012-13 over the revised estimates of the current year, most of it coming from indirect taxes which are estimated to grow by 22% in the case of customs duties, 29% in excise collections and 30% in service tax. While you could quibble about whether those will be achieved, they are not outlandish given the added levies, an assumed growth rate of the economy of 7.6% in real terms and an inflation rate of 6.5%.
What does seem odd is the estimate that expenditure will grow by just about 13% despite the FM himself peppering his speech with references to how much the outlay on just about everything has been raised. How do these apparently contradictory projections get reconciled?
The key to this paradox lies in the numbers relating to the government’s subsidy bill. The budget projects that the amount for “major subsidies” — which includes those on food, fertilizers and petroleum products — would come down from the revised estimate of Rs 2.09 lakh crore for the current year to Rs 1.8 lakh crore for the coming year.
Now consider what has actually happened on this front in the past. The revised figure for the current year represents a roughly four-fold jump from just five years ago. More to the point, the increase between 2010-11 and 2011-12 alone is of the order of 27% or Rs 44,000 crore. If that same pace of increase were to be maintained in the coming year, the figure should actually have been more than Rs 2.64 lakh crore.
In other words, the budget estimate on this head alone saves the FM nearly Rs 85,000 crore compared to what would have been expected on a business-as-usual basis. That’s no small saving. Take that saving away and the projected fiscal deficit would have been 6% of GDP against the 5.1% he is suggesting. So Mukherjee is banking heavily on the challenging task of cutting fertilizer and petroleum subsidies (and not providing anything extra for the food security bill) to keep budget numbers intact.
Budget 2012
Budget News 2012