Effective Revenue Deficit

Finance minister Pranab Mukherjee has introduced an alternate revenue deficit in the Budget for 2011-12 by knocking off grants provided to states from revenue expenditure. The assumption is these grants are used by the states for creation of productive assets. What has raised eyebrows, however, is the quantum of such grants — Rs. 90,792 crore in 2010-11 and Rs. 1,46,853 crore in the next financial year.

"Since a significant proportion of revenue expenditure is being provided as grants for creation of capital assets, it would be pertinent to look at the effective revenue deficit of the government," said the statement laid down by Mukherjee as required under the FRBM Act. Reducing such grants brings down the revenue deficit to an optically nice number 2.3 per cent of the GDP for the current financial year and 1.8 per cent for 2011-12. But for this, the revenue deficit is projected at 3.4 per cent of the GDP both for the current year and the next year.

Experts see it as "playing with the numbers". "A better way of classifying these grants would have been by splitting them into components of revenue and capital expenditure because not every rupee sent as a grant is used for constructing roads or houses," said an economist with a leading think-tank and who has closely associated with policy-making.

Former expenditure secretary Dhirendra Swarup said grants are always taken as revenue expenditure. "The global practice is not to treat it as capital expenditure. One may, however, like to show it separately as money being used by states and non-government organisations for creation of assets," he said.

"Internationally, there is no concept of an effective revenue deficit as most countries tend to use accrual accounting. The concept of an effective revenue deficit can be used as a short term measure in India until we move to an accrual accounting system," said DK Srivastava, director, Madras School of Economics.

Srivastava said that this is not a straightforward issue but is very specific to countries where substantial transfers go from the Centre to states. "While such grants may be shown as revenue expenditure at the Centre, at the state level it could be accounted for as capital expenditure if it is used for asset creation. At the time of calculating gross revenue deficit, such grants would be counted only once-either at the state or the Central level," he noted.

Explaining the non-reduction in revenue deficit as a percentage of GDP in 2011-12 compared with revised estimates of 2010-11, the FRBM statement said this must be seen in the context of windfall gain in revenue receipts of Rs. 1,20,806 crore through 3G and BWA spectrum auction in the current year. This one-off receipt alone contributed in correcting the revenue deficit for 2010-11 by 1.3 per cent of the GDP.