In the mid-year economic review presented in Parliament Friday, the finance ministry said the 4.1 per cent fiscal deficit forecast had been based on some dodgy estimates about revenue collections and the pace of economic growth in the country this year.
The mid-year review said revenue collections for 2014-15 had been overestimated by Rs 105,000 crore - which it blamed on the overestimation of nominal GDP growth and the unrealistic expectations about tax buoyancy.
The government said the revenue overestimation of Rs 105,000 crore - roughly 0.84 per cent of the likely GDP figure for this financial year - is "broadly the shortfall that now looms ahead".
But the review doesn't say why the Modi government - which had stormed to power with a massive mandate in the June elections - failed to question Chidambaram's overblown numbers when it presented its own budget in July.
At that time, Jaitley was aware that he was walking into a trap - but chose to be adventurous.
In his budget speech, he said: "My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year. Considering that we had two years of low GDP growth, an almost static industrial growth, a moderate increase in indirect taxes, a large subsidy burden and not so encouraging tax buoyancy, the target of 4.1 per cent fiscal deficit is indeed daunting. Difficult, as it may appear, I have decided to accept this target as a challenge. One fails only when one stops trying."
The mid-year review broke down the revenue overestimation of Rs 105,000 crore into two components. It attributed the revenue overestimation to the growth optimism - the budget had assumed a nominal GDP growth of 13.4 per cent - at Rs 27,000 crore, or 2.2 per cent of GDP.
The overestimation of tax buoyancy was far in excess of historical performance, the review said.
The budget had estimated overall tax buoyancy (relative to nominal GDP) of 1.5.
Tax buoyancy is an indicator to measure efficiency of revenue mobilisation in response to growth in the GDP. A tax is said to be buoyant if the tax revenues increase at a faster pace than the rise in national output.
In general, the optimism was greater in relation to indirect taxes (customs, excise and service tax) rather than direct taxes (income and corporate tax).
The review said in the case of service tax, the assumed elasticity over-estimated revenue by Rs 26,000 crore (0.2 per cent of GDP).
In the budget, service tax collections had been estimated at Rs 215,973 crore, an almost 31 per cent increase over the revised estimate of Rs 164,927 crore for 2013-14.
"Some of this optimism may have been on account of the expansion of the tax base for services but the assumed buoyancy was apparently not realised," the mid-year review said.
In aggregate, the elasticity assumptions "may have led to revenue optimism by about Rs 78,000 crore," it added.
The upshot of all this is that Jaitley will now have to scramble to fill the Rs 105,000-crore hole in the government's books very quickly if he wants to close the year with a fiscal deficit of 4.1 per cent.
The finance ministry has already ordered an austerity drive but that won't be enough.
He will need to get the telecom and coal auctions quickly off the ground and kickstart the divestment process that has been stalled even though the cabinet cleared the sale of 10 per cent in Coal India and 5 per cent in ONGC back in September.
Is there some learning in all this?
Some wisdom has dawned on the Modi government. The mid-year review says: "This experience should inform the forthcoming budget."
- The Telegraph, Calcutta