Anachronistic budgeting

Is the 2007-08 fiscal deficit 3.1 per cent of GDP, or is it 3.5 per cent ""as the finance minister will tell you it is after you include the below-the-line expenditure on oil and fertiliser bonds? Or, is it 4.1 per cent because some more such bonds are likely to be issued before the end of March? The International Monetary Fund's figure for the year is 4.3 per cent, because it keeps out disinvestment receipts. For good measure, the Prime Minister's economic advisory council thinks below-the-line items total 2 per cent of GDP "" but that includes state governments. Such problems of definition are legion. Government-owned banks get recapitalised in a way that there is no cash outflow from the government, and therefore do not get booked as borrowings in the Budget. Mr Chidambaram himself argues that he inherited such gaps in 2004 "" the deficit for 2003-04 is 4.5 per cent, whereas in truth it was 5.1 per cent. In past years, finance ministers have also played with tax refunds (delay them till April, and they don't show up in the current year's numbers). For several years, the Budget has also under-provided for the fertiliser subsidy; while this has made the deficit numbers look better, while the fertiliser companies have carried the burden.

Definitional problems are not confined to government accounting. Accounting standards differ across countries, and only recently has there been a move to get internationally recognised accounting norms agreed on. Clearly, the time has come to do something similar about government accounting. The finance minister himself has referred the problem of below-the-line items to the Finance Commission, but that is not enough. The much bigger problem is that the government prefers to do cash accounting "" which means (among other things ) that it does not recognise liabilities that have accrued but not been paid out. It also does not account for non-cash items "" like depreciation, which would tell us whether assets created out of budgetary spending are being run down or renewed. In this sense, the government's accounting system is one of the most archaic in the world, and it is about time the country got a more modern system.

The US government, for instance, produces two sets of numbers, one called the President's Budget, which is based on the cash method. The other, the Financial Report of the US Government, uses the accrual method "" for the year ended September 2006, the President's Budget showed a deficit of $248 billion, compared to $449 billion in the Financial Report! Pension and other retirement benefits typically get added in the Financial Report. Many governments have started doing accrual accounting over the past decade "" the list includes the UK, New Zealand, Australia, France, and Canada. India should join that list.

A further reform measure would be to give autonomy to the accounting exercise, so that ministers cannot fiddle with the numbers or decide how they are to be presented in any year. The accounting office would then report directly to Parliament, and present the numbers there in the same manner that the Comptroller and Auditor-General presents audit reports on government spending directly to Parliament, without ministerial intervention.