The Comptroller and Auditor General (CAG) has informed the government that off-Budget liabilities such as raising of money by entities like IRFC, Power Finance Corporation (PFC), Food Corporation of India (FCI) and special banking arrangements for fertiliser companies, totaling up to Rs 3 trillion, should be included in Budget numbers.
The numbers, once added to the fiscal deficit, expand it close to 6 per cent as percentage of gross domestic product (GDP) for 2019-20, instead of 3.3 per cent, as shown by Finance Minister Nirmala Sitharaman in the Budget papers tabled in Parliament on July 5.
The issue has been flagged in audit reports by the CAG tabled in Parliament in February this year, as well as in its recent presentations to the 15th Finance Commission. India’s supreme auditor has advised the government to “consider putting in place a policy framework for off-Budget financing, which, among others, should include disclosure to Parliament”. It has also pointed out that this is not a one-off development and has been rising in scale for almost a decade. Since aggregate numbers are hard to come by, the CAG has instead provided illustrative figures since 2011-12 to prove its point.
Finance ministry officials said the legal framework of the Fiscal Responsibility and Budget Management Act empowers them to keep off-Budget financing, or extra budgetary resources, out of the fiscal deficit
“The CAG’s assessment is a subjective one. One can debate and argue at a theoretical level on off-Budget financing, as part of fiscal deficit, but an audit needs to be formally against a framework, which is the FRBM law in this case. And the law clearly tells us that debt includes off-Budget financing and extra budgetary resources, and fiscal deficit
does not,” a senior government official told Business Standard.
“To say the government is wrong is an incorrect assessment, because it is right according to the law. The legal framework clearly includes extra budgetary resources in debt, and excludes them from fiscal deficit,” the person said.
In its assessment, the CAG has stated that the key element of the disclosure to the legislature should be — the rationale and objective of off-Budget financing, the quantum of such financing and the extent of budgetary support and details during a financial year through all state-owned agencies.
The 15th Finance Commission is expected to take a sympathetic view of the CAG’s observations. Earlier too, a revision in the two-decade-old FRBM Act was made on the basis of the observations made by the CAG.
According to India’s supreme auditor, the push for off-Budget borrowings has risen because the government is trying to meet both, a rising demand for subsidy and for capital expenditure. The carry forward liability for just food and fertiliser subsidy since 2011-12 has ballooned and is averaging 0.5 per cent of the GDP. (see table)
While the finance ministry has gone some way to meet the same in Budget 2019-20 showing for the first time, some of the extra-Budget borrowing, it has been conservative. It has also informed the CAG that “all off-Budget borrowings remain within the scope of Union Budget since both the provisioning of repayment of principal and of interest of off-Budget borrowings is being made through the Budget”.
On the impact of food subsidy, the CAG observed that the Centre has forced the FCI to borrow through government-supported bonds, unsecured short-term loans and even through dipping into the National Small Savings Fund, which risks the returns on them meant for providing safety net to those with fixed income.
“It is evident that there was increase of about 350 per cent in carried over subsidy arrears in the five years preceding 2016-17, which require financing from a number of methods, including very high interest cash credit facility, which increases actual cost of this subsidy substantially,” it has said.
The auditor has also pointed to the huge market borrowing by Power Finance Corporation of over Rs 2 trillion by the end of 2016-17.