Venkatram Reddy Sureddy
(This article is the first part in the series Fraud, False Promises and Fiscal Imprudence highlighting the misadventures of TRS Government in Telangana)
“It was like riding a tiger, not knowing how to get off without being eaten.” – Ramalinga Raju, Chairman, erstwhile Satyam Computer Services after confessing his fraud of over Rs. 7,000 Crores in 2009
Facts first: The Budget 2018-19 of Telangana Government presents a rosy picture of growing revenue surplus. Revenue surplus is obtained by subtracting the revenue expenditure of the state from the revenue receipts (tax and non-tax revenues) of the state. The more the revenue surplus, the healthy the economy of the state. TRS Government shows rising revenue surplus through the years: Rs. 1,385 Crores in 2016-17 (Actuals), Rs. 1,545 Crores in 2017-18 (Revised Estimate) and Rs. 5,520 Crores (Budget Estimate) in 2018-19.
Accounting Fraud: However, as per CAG’s (Comptroller and Auditor General) report on Telangana state finances for 2016-17, the revenue surplus of Rs. 1,386 Crores has been overstated by Rs. 6,778 Crores.
How is it possible? Revenue Surplus is revenue receipts minus revenue expenditure. By overstating revenue receipts and understating revenue expenditure, this is very much possible. What TRS Government did was very simple: It showed Rs. 2,500 Crores it borrowed as revenue receipts and it showed Rs. 4,278 Crores it spent (revenue expenditure) as equity/loan. Thus, it was able to inflate the revenue surplus figure by Rs. 6,778 Crores. So, in reality for the financial year 2016-17 Telangana didn’t have Rs. 1,386 revenue surplus. In fact, Telangana had a revenue deficit of Rs. 5,392 Crores. (See table below to understand how the numbers were manipulated)
Implication: If the accounts of 2016-17 itself show Rs. 6,778 Crores overstatement, we have to wait until CAG does its audit for 2017-18 and 2018-19 to know the real financial health of Telangana.
Why did TRS Government overstate revenue surplus? Only the government can say. For all we know, it could be an accounting mistake. But such a mistake of such huge proportion and implication is grossly inefficient and unacceptable. Another possibility is that by cooking the books and showing revenue surplus, the government can take more debt. (See note below)
(Note: The Fourteenth Finance Commission (FFC) recommended that the fiscal deficit of all States be anchored to an annual limit of 3 per cent of GSDP for the award period (2015-16 to 2019-20). States with a zero revenue deficit, a contentious issue, and debt to GSDP of less than 25 per cent and interest payments to RR of less than 10 per cent may clock a fiscal deficit of up to 3.5 per cent! In other words, the FFC sanctions States with a modicum of fiscal responsibility to adopt lax practices.)
Afternote – A comparison with corporate world: Just ten years ago, when Ramalinga Raju of Satyam Computers did an accounting fraud to the tune of Rs. 7,000 Crores by overstating the revenues using fake invoices to show profits, Satyam’s share price fell down from Rs. 544 in 2008 to Rs. 11.5 in January 2009. Shareholders lost confidence in Satyam’s management and eventually Satyam was acquired by Mahindra Group. In 2015, Ramalinga Raju was found guilty for inflating the company’s revenues and falsifying accounts among other and sentenced to seven years imprisonment.