Tip of the iceberg

The Comptroller and Auditor General of India (CAG) on Tuesday tabled its report on spending in Parliament. The national auditor expressed concern that the government has taken to financing its expenditure through various methods of borrowing that are not reflected in the headline numbers in the Union Budget. It thus disguises the true level of the crucial revenue and fiscal deficits, and appears to be keeping to the path of fiscal consolidation even while deviating from it. There are multiple ways in which the government has been accused by the CAG of concealing off-Budget expenditure. For example, special banking arrangements were used to conceal the deferment of fertiliser subsidies. Spending on irrigation was masked by borrowing by the National Bank for Agriculture and Rural Development or Nabard. Railway expenditure was covered by borrowing by the Indian Railway Finance Corporation, and spending on power projects by the Power Finance Corporation. None of these are under the Budget and thus subject to Parliamentary approval. Yet they are definitely aspects of spending. Thus, the balance of power between the executive and the legislature is being disturbed. It also fails to be transparent and thus short-changes savers and investors.

Investors require a fiscal deficit number that is credible, and reflects the true level of government borrowing and spending. Using that number they can come to conclusions about the future demand for debt, the nature of inflationary pressures, and so on. The more transparent these are, the better the market works — and the more money can be raised going forward. Thus, the government should not sacrifice the effectiveness of the bond markets to its short-term desire to raise more finance while appearing fiscally conservative. The deception of savers is also important. Consider the misuse of the National Small Savings Fund or NSSF, for example. These are savings that have been given to the government as a trustee. It is now being used to prop up public sector bodies that no competent investor would want to put their money in, following a rules change by the government allowing such investments out of the small savings fund. For example, the small savings fund has lent money to the troubled and loss-making state-owned airline Air India, which is not even a risk-loving fund, let alone one that serves as a trustee of small savings, would claim is a safe and productive investment. 

The mismanagement of the Food Corporation of India (FCI) is another case in point. The government has passed on its own food subsidy burden, which should come out of the Budget, on to the FCI. The FCI has borrowed to pay for that burden — and is now dipping into the NSSF to the tune of tens of thousands of crores to service that debt. In 2017-18, the FCI took loans of Rs 65,000 crore from the NSSF — partly for fresh expenditure, and also to repay some of the principal of an earlier loan. All this money should in fact have been part of official government expenditure in the Budget. The CAG is thus right to question the credibility of government fiscal statistics. The forthcoming Union Budget should incorporate no such sleight of hand and instead give the true picture of central finances.

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