Fiscal transparency

The latest report of the Comptroller and Auditor General (CAG) on the accounts of the Union government has raised several concerns. The way the government manages its finances will only increase complications in the current year and beyond. The pandemic has radically changed the Budget reality as revenue collection will fall short significantly and expenditure is likely to overshoot the target. As a result, the fiscal deficit for the year will be much higher than the Budget estimate. Fiscal expansion and a significant increase in public debt mean that government finances will remain under pressure for several years. Thus, to maintain market confidence and bring government finances on track, it will be important for the government to present its accounts transparently. This would require a break from the past. Creative accounting and unrealistic fiscal targets will only create confusion in the market.

The government will need to make changes in a number of areas. For instance, the CAG report for the year ended March 2019 notes that a clear trend of revenue shortfall was not factored in while preparing the revised estimates for the year. This indicates an unrealistic estimate of financial resources. However, this is not a one-off problem. The government often makes unrealistic assumptions and then uses various methods to attain fiscal targets for the year. Even though the CAG had raised it in the previous year, the devolution of integrated goods and services tax (IGST) was not consistent with the provisions. The Union government retained more funds during the year under review.

Further, during the year GST compensation cess worth Rs 40,806 crore was short-credited and retained in the Consolidated Fund of India. This resulted in an overstatement of revenue and an understatement of the fiscal deficit. Besides, part of the cess collected on various central taxes during the year was neither transferred to the related funds nor utilised for the purpose it was collected. Cess and surcharge are now essentially used to avoid sharing central tax revenue with states. However, the problem is not limited to tax revenue. The government, over the years, has also made one public sector firm buy another to raise funds under the disinvestment head. In this context, the CAG has rightly pointed out that such disinvestment only results in the transfer of resources that are in the public sector to the government. This was not the idea behind disinvestment. The government has resorted to such a method just to meet fiscal targets.

The CAG has also raised matters related to transparency in the presentation of government accounts. For example, the government shows external debt at historical exchange rates and the conversion to the current rate is shown in the footnote. During the year under review, the difference was over Rs 2 trillion. Such practice clearly affects transparency. The CAG has also objected to the frequent use of “other receipts”/“other expenditure”, which results in opaqueness of government accounts. The need for transparency in accounts cannot be overstated, and the government must move in this direction. Unrealistic fiscal assumptions will make things more difficult in the present circumstances. The government would do well to reassess the fiscal position transparently in the current year and prepare a fresh medium-term road map.


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel