Millennium Post

Fiscal profligacy?

CAG has expressed concern over macroeconomic stability – a possible outcome of omitting revenue deficit targets

Fiscal profligacy?

Comptroller and Auditor General has pulled up the government for doing away with revenue deficit targets from this financial year, which did not augur well for macroeconomic stability and fiscal situation as it could lead to revenue expenditure like subsidies being met through debt.

This also meant resorting to fiscal profligacy as less of borrowed money will be available for capital expenditure, which is not a happy economic situation, warned analysts.

Though several analysts, including NIPFP economist N R Bhanumurthy, have been raising alarm bells on this score ever since the government dispensed with revenue deficit target for the first time in the budget 2018, it has now come to the fore, with Comptroller & Auditor General passing strictures on the government's fiscal situation saying addressing revenue deficit is critical to containing fiscal deficit.

The CAG report on compliance of the Fiscal Responsibility and Budget Management Act (FRBM), tabled in Parliament in the second week of January, clearly indicated all is not well with the fiscal situation.

According to the FRBM Act, financing the gap between revenue expenditure and revenue receipts through borrowing clearly implied deferred taxation, as debts raised in current financial years would ultimately be paid by collecting money from taxation in future unless the government augments its non-tax revenue receipts.

FRBM Act was amended in 2018 to remove revenue deficit targets, which would be applicable for 2018-19 onwards. According to CAG, the government claimed that this strategy will not compromise on the capital expenditure since it is meeting the requirement through off-budget borrowings. This is because debt raised for the purpose would be repaid through revenue generated from such projects. Thus, both revenue and capital expenditure needs of the economy would be met.

But CAG maintained that such off-budget financing is a tool of deferring the expenditure for subsequent years. As such, the overall quantum of such borrowings remains beyond the calculation of fiscal indicators. Despite being solely dependent on the government's implicit or explicit guarantees, such borrowings are not being included in accounts either as debts or guarantees.

This meant the government is using off-budget borrowings for financing schemes and subsidy. Though the interest on such borrowing is budgeted for under the relevant head, the modality of repayment of debt or borrowing is not spelt out.

CAG analyses the trends in revenue deficit for three years from 2014-17 and finds that revenue deficit targets as mandated by FRBM Act had been met at 2.9 per cent of GDP, 2.5 per cent and 2.1 per cent respectively. But these have been met by off-budget financing of food and fertiliser subsidy and CAG cites a few case studies in this regard.

In one case study, CAG clearly points out that when the budget allocation made to the ministry of chemicals and fertilisers in a financial year is not sufficient to clear all dues of fertiliser subsidies, then it is carried over to the next financial year.

Against the subsidy expenditure of Rs 70,592 crore, the carryover liability was Rs 26.417 crore in 2012-13. In 2013-14, the subsidy expenditure was Rs 71,280 crore, of which Rs 40,341 crore was carried over to next year. In 2014-15, the figures were Rs 75.067 crore and Rs 31,831 crore. In 2015-16, they were Rs 76,538 crore and Rs 43,356 crore. In 2016-17, they were Rs 70,100 crore and Rs 39,057 crore.

The carryover liability is accumulated subsidies, which adversely affect the cash flow of companies that have huge subsidy receivables from the government. To overcome the liquidity problem of fertiliser companies, the department makes special banking arrangement in which loans from PSU banks are arranged to make payments of interest on these loans at government security (G-sec) rate. Interest rate over and above G-sec is borne by the fertiliser companies. Resorting to such special banking arrangement to improve the liquidity of fertiliser companies is an off-budget arrangement for financing part of the subsidy payment, which is deferred.

CAG has done similar case studies of off-budget arrangement for subsidy payments in Food Corporation of India and in the government's accelerated irrigation programmes.

CAG warns that such off-budget financing of subsidies, which is a revenue expenditure, increases cost and understates subsidy expenditure and prevents transparent depiction of fiscal indicators for the relevant year.

CAG cautioned revenue deficit, though contained within limits, constitutes a large part of the fiscal deficit. This is because revenue deficit last year was around 2.1 per cent of GDP as against the fiscal deficit of 3.3 per cent of GDP. This meant nearly two-thirds of money borrowed goes into meeting the revenue expenditure like subsidies, thereby leaving only one-third of the borrowed money for capital expenditure.

This will not boost economic development and instead slow down growth prospects.

Further, the FRBM Act as amended in 2018, which has done away with the revenue deficit target, carries the risk of not addressing the critical issue of revenue deficit. As per the original FRBM Act of 2003, the fiscal deficit was to be brought down to 3 per cent of GDP and revenue deficit to zero so as to ensure that no borrowing is done for revenue expenditure and all borrowings are for capital expenditure to bring about macroeconomic stability.

CAG also felt that there is a danger now of deployment of borrowed funds in areas which do not generate enough returns to cover future debt servicing needs.

(The views expressed are strictly personal)

K R Sudhaman

K R Sudhaman

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