New Delhi: India’s already-slowing economy would’ve been worse off in 2018-19, the last financial year, and possibly even in 2019-20, if the Modi government had not relied on off-budget borrowings by state-owned firms, shows new data.
The Controller General of Accounts (CGA)’s provisional figures, as of March-end, and budget numbers show that India’s fiscal deficit may have shot past 4 per cent of the gross domestic product (GDP) in 2018-19 — instead of the reported 3.4 per cent — if not for these off-budget borrowings.
The CGA data released two weeks back shows India’s FY19 fiscal deficit was at Rs 6.45 lakh crore, higher than the revised estimate of Rs 6.34 lakh crore. However, the Modi government managed to keep the deficit within 3.4 per cent of GDP, as set in the revised estimates, courtesy a higher-than-estimated nominal GDP.
The Modi government used the off-budget borrowings by Food Corporation of India (FCI), National Bank for Agriculture and Rural Development (NABARD) and other firms — amounting to over Rs 1 lakh crore — to remove some of its revenue and capital expenditure from the fiscal deficit calculations.
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.
These resources that the public sector undertakings raise are repaid for — including entire principal and interest — from the government budget.
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‘Fiscal deficit higher than 4.1%’
Last week, The Financial Express reported how India’s fiscal deficit would have come in at 4.1 per cent for fiscal 2019 if off-budget borrowings were included.
“Optically, the government is saying that the fiscal deficit is 3.4 per cent. But if you add all these off-budget borrowings, then the fiscal deficit will be higher than 4 per cent,” Anubhuti Sahay, senior economist at Standard Chartered Bank, told ThePrint.
Sahay said debt issuances by the public sector enterprises — the way these firms raise off-budget borrowings — are flooding the market along with the debt issuances by central and state governments.
“The off-budget borrowings is one of the most important reasons why the bond markets remain cautious despite low inflation, low growth and RBI rate cut,” she said.
“Along with the monetary policy, markets will be eagerly watching the fiscal policy to understand what will be the level of supply. At the end of the day, the investor base is the same for all these papers.”
Raising the money
When the interim Union budget was presented in February, JP Morgan economists Sajjid Chinoy and Toshi Jain had flagged that FCI’s borrowings through extra-budgetary resources was at nearly 1 per cent of India’s GDP.
The budget documents show how FCI, the agency which administers India’s Food Security Act, raised Rs 1.96 lakh crore through extra budgetary resources in 2018-19, as against an initially budgeted amount of only Rs 71,995 crore.
In 2019-20, it is estimated to raise Rs 1.76 lakh crore through this route.
NABARD also raised nearly Rs 30,000 crore in 2018-19 through extra-budgetary borrowings for work administered by the Ministry of Rural Development and Drinking Water and Sanitation.
The Rural Electrification Corporation raised Rs 15,000 crore and Power Grid Corporation of India Rs 16,310 crore, among other state-owned firms, in the same fiscal.
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‘Expect govt to be fiscally prudent’
After the announcement of monetary policy decisions Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das said the government has broadly followed the fiscal glide path when asked if off-budget borrowings will edge out private sector investment.
The fiscal glide path sets the deficit targets for the next few years.
“The total borrowing requirements of PSUs will have to be seen from the perspective of two points. For example, NTPC and NHAI undertake a lot of capital expenditure and have borrowings but have their own revenue streams to repay them and are not dependent on their budget,” said Das.
“It is better to look at that borrowing as capital investment requirement of the economy. So far, the other sectors are concerned, government has broadly maintained the fiscal deficit glide path and we do expect the government to be fiscally prudent,” he added.
Need for budgetary control
To be sure, the practice of off-budget liabilities was first started by P. Chidambaram who introduced the concept of oil bonds in 2005-06 when he was finance minister.
Despite the Comptroller and Auditor General (CAG) flagging the use of off-budget financing in the past, the government continues to use this mode 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.
The CAG went on to recommend that the Modi government should consider putting in place a policy framework for off-budget financing including disclosures to Parliament.
However, for new finance minister Nirmala Sitharaman, who will present her first budget on 5 July, keeping the fiscal deficit target at 3.4 per cent in 2019-20 and limiting off-budget borrowings will be major challenge — especially in the wake of slowing tax revenues and a huge need for public investment-led growth.
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Not just lenders who buy different categories of government bonds, serious investors would first want the government accounts to be cleaned up, official statistics to begin to reflect the true state of the economy. The large amount of funds borrowed by the railways for capital expenditure are not leading to higher earnings from passengers and freight. Road projects have not proved to bankable / profitable for private firms, unclear how they will fare in the hands of NHAI. The new FM should stamp her authority from the first Budget. The economy will not be able to sustain another term of pedestrian helming.