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Before Modi govt can hope to fix India’s economy, it should fix how it manages Budget

In recent years, Budget management under Modi govt has been challenging because of the economic slowdown, and GST implementation.

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The presentation of the Union Budget is always a melodramatic occasion – full of hype and excitement, especially in the boisterous Indian democracy. But it seems that elements of farce have made their way into this melodrama, causing a great deal of confusion.

Budget management took a major turn in 2017-18. In that year, the expenditure met from the resources of public sector enterprises increased by more than 80 per cent over the previous year (from Rs 3.38 lakh crore to Rs 6.1 lakh crore), while on-Budget expenditure grew by 8.4 per cent only. It was an off-Budget fiscal stimulus. Public sector enterprises borrowed to meet the additional expenses.

Public sector enterprises may borrow for their own purposes and service the debt from their commercial earnings. Moreover, the public sector enterprises implementing government schemes may borrow working capital, because administrative reasons lead to a mismatch between the actual expenditure in a year and the government transfer during the year.

However, if the government moves its own borrowing to the public sector enterprises, and in the process makes its fiscal deficit look lower, then it is a cause for worry.

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Beginning of the problem

In recent years, Budget management has been challenging because of the economic slowdown, and the implementation of the Goods and Services Tax (GST). In 2017-18, disappointing dividends from the Reserve Bank of India (RBI) and public sector enterprises, as well as proceeds from spectrum auction, led to a shortfall in non-tax revenues (by almost Rs 1 lakh crore). In 2018-19, the tax collections fell short by about Rs 1.6 lakh crore. The Narendra Modi government has had to keep growth of on-Budget expenditure limited, and in 2018-19, expenditure was kept well below the budgeted amount (by Rs 1.46 lakh crore).

How do you win an election while facing such constraints? The government could have allowed the fiscal deficit to rise, citing the economic slowdown and the GST as reasons for slippage. It could have intensified privatisation of firms and assets. It could also have done expenditure management reforms. Instead, the Modi government chose to move the borrowing off-Budget, compromising the integrity of Budget management. This was not a good choice. The government must stop riding this tiger before it becomes too big and restore the integrity of the Budget management process.

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Working up dues

Consider food subsidy. Food Corporation of India (FCI) procures food grains, and supplies them at a subsidised rate. The gap is the government’s food subsidy bill. In addition, there is a system of decentralised procurement by states, for which the central government give the subsidy. Every year, because of administrative reasons, there is a mismatch between the actual subsidy bill and the funds released by the central government. It releases the balance amount in the subsequent years.

Between 2012-13 and 2015-16, the central government, on an average, gave to FCI about two-thirds of the subsidy incurred by FCI in the year, and the remaining dues were settled in the subsequent years. So, each year, the central government’s total transfer to FCI comprised that year’s subsidy bill and previous years’ dues. FCI borrowed working capital to meet the expenses.

In 2016-17, the Modi government’s transfer to FCI covered only 48.9 per cent of the subsidy bill during the year. However, in 2017-18, the entire government grant to FCI (Rs 61,982 crore) was towards the dues from previous years, and no money was transferred for that year’s subsidy bill (Rs 1.16 lakh crore). In 2018-19, subsidy incurred by FCI was Rs 1.32 lakh crore, but the government only transferred Rs 70,098 crore – all towards previous years’ dues.

FCI’s outstanding loans increased from Rs 1.17 lakh crore in 2015-16 to Rs 1.56 lakh crore in 2016-17 to Rs 2.43 lakh crore in 2017-18. It further went up to Rs 2.78 lakh crore in 2018-19. FCI always borrowed for working capital purposes, but it seems that it is now being asked to borrow more, so that the government can postpone the acknowledgement of the real budgetary deficit.

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A sense of Budget

The total transfer from the central government to FCI used to be close to the total subsidy bill during a year, even though part of the transfer was for previous years’ dues. This maintained some discipline in the Budget management process. A key problem with what is happening now is that the government has much more discretion on how much subsidy it places on the Budget in any year. It is important that the government has a sense of the Budget constraint. There are always more demands than resources. In any case, all this will have to come on the Budget someday.

Food subsidy is just one example. The huge increase in expenditure from resources of public sector enterprises includes other schemes and areas of expenditure as well.

Two other elements of this story are worth mentioning.

First, since 2018-19, a large amount of scheme funding is being met from fully serviced bonds issued by public sector enterprises. Interest and principal on these bonds are to be paid by the government, but they are not shown as part of government borrowing. The outstanding value of these bonds in 2018-19 was Rs 88,454 crore. A substantial portion of expenditure on schemes such as Pradhan Mantri Awas Yojana, Saubhagya Yojana, Swachh Bharat Abhiyan, and Pradhan Mantri Krishi Sinchayee Yojana were met from these bonds.

Second, a large part of this additional borrowing by public sector enterprises is from the National Small Savings Fund (NSSF). Until 2015-16, the NSSF made loans only to the central and state governments. In 2016-17, the fund was allowed to lend to FCI, which borrowed Rs 70,000 crore from it. At that time, it was mostly a substitute for the cash credit that FCI used to take from banks. However, from 2017-18 onwards, the NSSF lending to FCI increased to Rs 1.21 lakh crore, and lending from the savings fund was opened to a number of other public sector enterprises. As on 1 April 2019, the NSSF had outstanding loans of Rs 2.85 lakh crore given to various public sector enterprises. Being a public account managed by the government, the NSSF is an opaque source of funding for the public sector enterprises.

What began in 2017-18 continued in 2018-19. The budget for 2019-20 projected a decrease in the expenditure met from public sector enterprises, but given that a huge shortfall is expected in the budgetary receipts, the Modi government must have again faced the temptation to move the expenditure burden to public sector enterprises.

When Finance Minister Nirmala Sitharaman rises to present the Budget on February 1, we will know if the Modi government has chosen to continue with the farcical elements of this Budget drama or if it is willing to restore it back to its routine melodrama.

The author is a Fellow at Carnegie India. Views are personal.

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  1. To the point, well argued and unbiased article must be a novelty for The Print!
    The fact is that total expenditure of the GOI has increased manifold and has not kept pace with the revenues over the years. Due to FRBM constraints, accounting fudging has to be resorted to which leads to distortions and opacity over a period of time. This is a good time to bring complete openness to the budgetary numbers and if necessary, change FRBM threshold to say, 10% till 20024. If inflation is under control with actual fiscal deficit at say 8%, then 10% target is not going to affect inflation too much. This serious issue apart, presentation part of the Budget is essentially a shallow issue, as anyone can figure out the fudging easily.

    Further, the process of budget making must be open and traditional halwa making ceremony, printing the budget papers in secrecy must be done away immediately. We need open, transparent and durable changes in the budgetary process.

    Of course, what is presented in the budget is the real issue finally- whether Modi can show how he plans to make India a 5 trillion USD economy

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