By
K R Sudhaman
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
macro-economic 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
contain 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 collection 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 generation 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 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 fertilizer 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 fertilizers in a financial year is not sufficient
to clear all dues of fertilizer subsidies, then it is carried over to the next
financial year.
As
against the subsidy expenditure Rs 70,592 crore, of which carry over liability
was Rs 26.417 crore in 2012-13. In 2013-14, the subsidy expenditure was Rs
71,280 crore, of which Rs 40,341crore 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 cash flow
of companies that have huge subsidy receivables from government. To overcome
the liquidity problem of fertilizer 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 fertilizer companies. Resorting to such
special banking arrangement to improve liquidity of fertilizer 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 of relevant year.
CAG
cautioned revenue deficit, though contained within limits, constitutes a large
part of 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 revenue deficit
target, carries the risk of not addressing the critical issue of revenue
deficit. As per the original FRBM Act of 2003, fiscal deficit was to be bought
down to 3 per cent of GDP and revenue deficit to zero so as to ensure that no
borrowing is resorted to for revenue expenditure and all borrowings for capital
expenditure to bring about macro-economic stability.
CAG
also felt there is danger now of deployment of borrowed funds in areas which do
not generate enough returns to cover future debt servicing needs. (IPA Service)
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