As with every other Union budget in the country, all eyes will focus on the fiscal deficit number that India’s new finance minister, Nirmala Sitharaman presents on 5 July in her maiden budget speech. But for many investors and analysts, how that number is being calculated will matter as much as the headline number itself.
Over the past few years, the government has managed to keep the headline fiscal deficit figure under check. But as these pages had highlighted earlier, and as several analysts have pointed out since then, the fiscal consolidation record of the Narendra Modi-led government has been marred by growing use of off-budget financing.
Such off-budget financing to fund its revenue and capital spending have dented the credibility of the budget numbers, analysts said.
Data on off-budget liabilities sourced from A Prasanna, head of fixed income at ICICI Securities Primary Dealership, suggests that if these expenses were to be included in fiscal calculations, India is already in a deep fiscal hole, with the ‘adjusted’ fiscal deficit hovering near 5 percent of India’s gross domestic product (GDP).
The adjusted fiscal deficit calculations take into account the issuance of special bonds such as oil bonds, fertilizer bonds and Food Corporation of India (FCI) bonds till fiscal 2009 and National Small Savings Fund (NSSF) loans and government-serviced bonds issued by public sector entities in the more recent years.
An accounting trick that governments across regimes have used recurrently is the postponement of committed expenditure on subsidies, particularly food subsidy to FCI. Under the government’s cash accounting system, deferred payments are not considered as expenses.
Under the Modi administration, the unpaid bill of carryover liabilities seems to have become larger, rendering the FCI incapable of running its business without bailout loans from sources such as NSSF.
In fact, in the last two financial years the government seems to have converted part of its already incurred expenditure on subsidies to FCI into loans from NSSF. Data from the Controller General of Accounts (CGA) show that the government reversed about ₹70,000 crores of its incurred expenditure on subsidies in 2018-19 and about ₹42,000 crores in 2017-18 just before the end of the respective fiscal years.
The government would have asked the FCI to borrow (the equivalent amount) from NSSF, said M. Govinda Rao, an expert on public finance and an emeritus professor at the finance ministry-sponsored think tank, National Institute of Public Finance and Policy (NIPFP).
The role of NSSF in picking the burden of the government’s spending commitments is not limited to subsidy bills. Loans extended by NSSF to public sector entities such as FCI, National Highways Authority of India, and IRFC account for a significant chunk of the public sector capital spending in recent years.
To be sure, part of the funding from NSSF to state-owned entities in recent years is because the key borrowers in earlier years --- state governments --- now increasingly rely on market borrowings for their funds. This has left surplus funds with NSSF, which the Union government has tapped into. It has allowed the Union government to dump its liabilities on the books of state-owned entities, and report more presentable deficit numbers.
In addition, the government has increasingly tapped 'extra-budgetary resources' to finance its capital expenditure. In essence, this means that state-owned entities across sectors such as infrastructure, healthcare and education issue government-serviced bonds and incur capital expenditure on behalf of the government. Again, while the burden of interest payment and repayment of such bonds ultimately falls on the government, the liability of debt rests on the books of state-owned firms.
“Seen from the point of view of the state-owned companies like FCI, it definitely weakens their balance sheet if they are forced to borrow with no clarity on when the government will pay its dues," said Prasanna of ICICI Securities.
Another issue with such funding is that the government would have to maintain a higher interest rate on small savings to attract household deposits in such small savings funds. This would mean elevated costs of capital for the economy and would hinder the monetary transmission process, rendering cuts in policy rates ineffective, analysts said. The other concern with such borrowing is the problem of crowding out private borrowing.
“More you draw more from the household sector’s financial savings, directly or indirectly, the money available to the private sector will be less," said Rao. “But above all it means that the budget targets and public debt figures are not sacrosanct," he added.
To be fair, the concept of off-budget financing isn’t new. In the past, governments issued government-backed bonds by oil companies and fertiliser companies to defer subsidy payments. But the process has become more opaque than before. In earlier years, the economic advisory council used to provide an estimate of off-budget financing in its report on the review of the Indian economy but those estimates are not available anymore.
Though interest payment of such loans is budgeted for, the repayment of the underlying debt is not spelt out in the budget, said a Comptroller and Auditor General (CAG) report dated 8 January 2019. The same report also suggested that the total liability of the Union government at the end of fiscal 2017 stood at 50.5 percent of GDP (taking into account the understatement of public account liabilities of ₹7,63,280 crore), significantly higher than the estimate of 47.1 percent presented by the finance ministry in its Medium Term Fiscal Policy (MTFP) statement pertaining to that fiscal.
Any serious discussion on how the Indian economy has performed in recent years is hampered by, among other things, “the problem of public sector borrowing requirement (PSBR) being higher than the reported fiscal deficit because of extra borrowing by government agencies...," said a recent IDFC Institute working paper authored by the economist and Mint columnist Niranjan Rajadhyaksha .
There is an urgent need for the government to make its fiscal framework more transparent, analysts said. According to Rao, the most important reform which the government must take up expeditiously is to switch to the accrual accounting system to account for unpaid bills. This is a recommendation made by many of the past Finance Commissions but has not been implemented so far.
As these pages have argued earlier, instituting an independent fiscal council would also go a long way in boosting the credibility of fiscal data and in restoring the sanctity of the budget math.