HYDERABAD: When she presents her second budget next Saturday, policy wonks expect Finance Minister Nirmala Sitharaman to make a clean breast of all government borrowings.
This includes off-budget financing, which is nothing but debt taken by public sector enterprises (PSEs) such as the Food Corporation of India (FCI) to bridge the subsidy gap.
Usually, the government makes subsidy payouts through budgetary allocations, but because of the tight fiscal situations, governments often resort to off-budget financing to present an acceptable fiscal deficit number.
Off-budget borrowings aren’t a recent phenomenon and has been in practice for decades.
For instance, in FY09, off-budget financing was as high as 2.3 per cent of GDP, taking the total fiscal deficit including state borrowings to an alarming 10.7 per cent of GDP.
Currently, off-budget transactions are pegged at 2.9 per cent, which means our general government deficit (including states’ debt) is estimated at 8.8 per cent.
Excluding state borrowings and off-budget transactions, fiscal deficit for FY20 was projected at 3.4 per cent during the previous budget, but given the weak revenue collections, the target is unlikely to be met.
Moreover, markets expect the government to relax the deficit targets and present a fresh medium-term fiscal consolidation plan altogether.
“The most important announcement in the budget could be to make the event relevant by inducting public sector borrowing requirement (PSBR) along with the central government’s deficit/borrowing data. It’s essential to inform the nation that PSBR is almost double of the reported deficit of 3.5 per cent of GDP, which has put serious stress on domestic financial markets,” Nikhil Gupta, analyst, Motilal Oswal noted.
In the absence of all debt disclosures, some presume there’s sufficient fiscal room to offer stimulus, while others believe there’s not much headroom. “Irrespective of whether the government decides to follow fiscal conslidation or not, or relax deficit targets, a clear reasoning for its decision would help clear the air,” said Gupta.
Having inherited unbalanced books in FY15 — high fiscal deficit, high expenditure and high CAD — the NDA government knows better than anyone else about the consequences of mindless spending and reckless borrowing.
During its first term, it consciously retained off-budget borrowings within the previous trend line at 1.4 - 1.9 per cent between FY15 and FY18. Similarly, it also reined in fiscal deficit from a high of 4.1 per cent in FY15 to 3.4 per cent in FY19. However, the current fiscal is going to be an outlier, with borrowings by PSEs going off-kilter.
This spooked even the CAG, the government’s auditor, which warned that such borrowings, where government indirectly raises debt, but publicly discloses only interest outgo, aren’t a good accounting practice.
Why? Because, it masks total debt, increases the actual cost of the subsidy itself, defers committed liabilities, understates the annual subsidy expenditure and prevents transparent depiction of fiscal indicators. For context, it even highlighted how subsidy arrears for FCI shot up a staggering 350 per cent in the five years preceding FY17.
The government maintains that it discloses all off-budget transactions in budget statements, including details of ministry-wise internal and extra-budgetary resources of the public enterprises.
This is true. The next logical step is to start counting this as part of the broad fiscal deficit indicator.