New Delhi: When Finance Minister Nirmala Sitharaman defied expectations and lowered India’s fiscal deficit target for 2019-20 to 3.3 per cent of GDP in her first budget presentation this month, she was cheered by analysts and markets for sticking to a path of fiscal consolidation in the face of an economic slowdown.
But turns out that the target may be masking more than it reveals.
The real fiscal deficit is likely to be at least 1.5-2 percentage points higher than what the government has estimated for not just 2019-20 but also 2018-19, the financial year gone by, if the off-budget borrowings made by the government and flagged by the Comptroller and Auditor General of India (CAG) are taken into account.
How the calculation works
In a presentation to the 15th Finance Commission on 8 July, the CAG pointed out that the deficit for the fiscal before, 2017-18, came at 5.86 per cent as against the declared 3.4 per cent when the off-budget borrowings made by the government were included, The Economic Times reported earlier this week.
For its calculations, the CAG used the borrowings made by public sector enterprises for funding government schemes. These included fundraising from Food Corporation of India (FCI), National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), and the recapitalisation bonds used to capitalise state-run banks.
If one were to use these numbers to calculate the fiscal deficit for the subsequent two years, the effective fiscal deficit could be more than 5.5 per cent of GDP in 2018-19 and around 5 per cent in 2019-20.
Off-budget borrowings are those borrowings by state-owned firms that are not part of the official budget calculations but are used to fund government schemes. They are excluded from fiscal deficit calculations but are part of the overall debt of the Indian government.
These resources that the public sector undertakings raise are repaid for — including entire principal and interest — from the government budget. They are not accounted for in the current budget because they are future liabilities and not current liabilities.
To be sure, NHAI and IRFC have been traditional fundraisers from the market with the capacity to pay back the borrowings through their own revenue streams. The combined borrowings from these two entities is estimated at around Rs 1.3 lakh crore in 2019-20 and Rs 1.14 lakh crore in 2018-19.
Economists point out that even if the borrowings by these two entities is kept out, the fiscal deficit for the respective years would still be higher at more than 4 per cent as the government has relied on borrowings from public sector units to fund its social sector schemes and to meet its other obligations.
For instance, the FCI raised Rs 1.64 lakh crore in 2018-19 primarily to raise resources for implementation of the Food Security Act. It is estimated to raise Rs 90,257 crore in 2019-20.
Similarly, the government has relied on recapitalisation bonds to capitalise public sector banks instead of a direct infusion of capital to ease the pressure on the fisc. Recap bond issuances were at Rs 1.06 lakh crore in 2018-19 and Rs 70,000 crore in 2019-20.
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‘Nothing less than 4%’
Anubhuti Sahay, senior economist at Standard Chartered Bank, told ThePrint that the off-budget borrowings have been on the rise and the effective fiscal deficit for the last few years could be 4-4.5 per cent.
National Institute of Public Finance and Policy professor N.R. Bhanumurthy pointed out that the fiscal deficit calculations are done to determine how much resources are left for the private sector.
“Government borrowings and borrowings from state-owned enterprises are all part of the public debt component. India’s fiscal deficit is not going to be anything less than 4%,” he said.
Bhanumurthy added that fiscal deficit is not only a problem from the expenditure side but also on the revenue perspective as things like interim dividend from Reserve Bank of India and banks are all included to manage the number.
The CAG has repeatedly flagged the use of off-budget borrowings but the government continues to use this route to defer some of its liabilities and exclude them from the fiscal deficit calculations.
In January, the CAG report for 2016-17 raised concerns on how off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications. “Government has increasingly resorted to off-budget financing for revenue as well as capital spending.
“In terms of revenue spending, off-budget financing was used for covering deferring fertilizer arrears/bills through special banking arrangements; food subsidy bills/arrears of FCI through borrowings and for implementation of irrigation scheme (AIBP) through borrowings by NABARD under the Long Term Irrigation Fund (LTIF). In terms of capital expenditure, off-budget financing of railway projects through borrowings of the IRFC and financing of power projects through the PFC are outside the budgetary control,” it said.
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The principle enunciated in the argument made by the CAG is sound and logical. However, I would like to make one modification in the above argument. If the off-budget borrowings made by the government is the continuing practice, then the government will have outstanding payables to government owned entities in the beginning as well as at the end of the fiscal year. The government will have to clear the dues outstanding in the beginning of the year during that fiscal year, though the expenditure pertained to the previous year but was not accounted for in that year, By this logic, it is the the difference between the dues outstanding in the beginning and the dues outstanding at the end of the year that needs to be accounted for. Thus impact on the fiscal deficit will be significantly lower than what is stated in the CAG report. Not surprisingly, the presumably higher level of fiscal deficit has hardly made any impact on the inflation numbers, which continue to be moderate.
This fudge is pointless. It does not carry conviction with the people who really matter. Deep pocketed investors, the rating agencies. Expect Surjit Bhalla & Co to go blue in the face, arguing the establishment case.