Photo: Mint
Photo: Mint

Opinion | Payment delays and the fiscal-financial ricochet

Payment delays by govts at both the centre and states have become an entrenched disease

Today is the Union budget day for 2019-20. Aggregate borrowing by the centre in the eight months to November, as reported by the Controller General of Accounts, stood at 7.2 trillion. In absolutes, it is 92,000 crore higher than the budget estimate for the entire fiscal year and works out to 3.8% of gross domestic product (GDP), going by the advance estimate. This is direct borrowing by the government, excluding the off-budget borrowing going on. That being the case, the finance ministry’s assurance that the budget target for the fiscal deficit at 3.3% of GDP will be held is puzzling. But to focus on that issue is to join the deficit watch, which is what fiscal responsibility has been reduced to, while fiscal processes remain fundamentally unreformed.

Expenditure releases to spending departments have actually become more capricious than they were before the deficit watch took hold as a result of fiscal legislation. Postponement of expenditures to the next year has become commonplace. Since that can yield lower deficits only if the legacy of the previous year was lower, expenditure postponement will necessarily snowball over time. This process can be brought to a halt only by biting the bullet in a particular fiscal year and doing a one-time adjustment.

But there is another failing that is not even driven by any strategic intent, such as trying to reduce the reported deficit. Haphazard and unpredictable delays in budgeted (approved) expenditures happen simply because there is no systematic fund flow timetable driving fund allocation between ministries and departments. If such a framework ever existed, it seems to have collapsed. When the budget is approved in Parliament, the figures do not present the timing of release of what will necessarily be a tranched flow. Tranche releases are conditional (by long-standing practice) on receipt of certification of utilization of previous tranches from the spending department, but even after receipt, tranche releases may not happen due to fund-flow blockage somewhere. No one can predict the release date. Both source and destination departments live in a state of uncertainty and confusion.

These have a devastating impact on the real economy. Payment delays by governments at both the centre and states have become a deeply entrenched disease, despite several attempts at reform over the years. The infamous March spike in expenditure was sought to be smoothed out by requiring that 50% of expenditure be made before the mid-point of the fiscal year. An additional advance tax instalment was made due in mid-June to provide the revenue flow for payouts due early in the fiscal year. Even the advancement of the budget to the start of February, instead of the last day, was designed to have expenditure approvals in place before the start of the fiscal year.

But the system remains mired in delays. When the Infrastructure Leasing and Financial Services serial defaults happened in September 2018, it was widely reported that delayed payments by the National Highways Authority of India were a major contributor. Those delays then get further transmitted to the small vendors of these big vendors supplying to the government. For the micro, small and medium enterprises (MSME) sector, payment dues are the principal problem. Instead of doing the fundamental reform of fiscal processes within the government, such that payouts to vendors flow within a mandated period of receipt of goods or services, the standard response has been to load the burden of support for MSMEs upon the already stressed banking sector.

Starting with a 7 February 2018 circular, when cognizance was taken by RBI as the banking regulator of the toll on MSME units of the monthly filing requirement in the initial design of the GST (which was eased after a painful initial period of three months), to a further extension of forbearance on 6 June to all units regardless of whether they were GST-registrants or not, to the most recent New Year gift on 1 January, when further restructuring was permitted for MSME loans in default, banks were being asked to carry the can.

At the RBI central board meeting on 19 November 2018, which took note of MSMEs’ credit needs, it was promised a panel would be set up to examine the problems they faced. That has been acted on, and an excellent committee now stands constituted, with a report due by end-June. MSMEs are not merely primary victims of delays in government payments. They are secondary victims on account of sales to larger enterprises that suffered the primary delay. Even the problem posed by monthly filing under GST arose because MSMEs had to pay GST in for goods supplied before receiving payment (along with GST payable) from the buyer.

So, here is the fiscal-financial ricochet. Government delays payments to all; MSMEs are especially vulnerable as they function on narrow margins and don’t have the wherewithal to cushion unpredictable delays; they default on bank loans; banks experience enhanced credit stress even when regulatory forbearance means a default will not call for provisioning as a non-performing asset; government experiences fiscal stress from having to recapitalize stressed banks; and fiscal stress leads to payments to MSME units getting delayed even more. This is not just an issue with the Union government, it happens at all levels. Would it not be better to fix the fisc before taking on an additional burden like the quasi universal basic rural income scheme doing the rounds?

Indira Rajaraman is an economist.