One of the standout features of Saturday’s Union Budget was the disclosure of extra-budgetary borrowings. The government needs to be commended for increasing transparency and disclosing off-Budget borrowings as the markets will now have a better picture of government finances. The government’s attempt to clear the web of confusion by being transparent about the amount of borrowings that are not part of the Budget is certainly a good move. Using this route to fund expenditure had come in for intense criticism from the Comptroller and Auditor General of India.
According to the numbers presented in the Budget, the government is funding expenditure worth Rs 1.73 trillion in the current year through off-Budget financing, which is expected to go up to Rs 1.86 trillion in the next fiscal year. If this spending is included in the Budget, the fiscal deficit will go up to about 4.6 per cent of gross domestic product
(GDP) in the current year and 4.4 per cent in the next fiscal year. The bulk of the off-Budget financing is going in funding the food subsidy bill. Food Corporation of India
is borrowing Rs 1.1 trillion in the current year from the National Small Savings Fund, and the amount is expected to go up to Rs 1.37 trillion in the next fiscal year.
While the government has indeed taken a step forward by disclosing the expenditure, it clearly needs to do more to build trust in government finances. For one, it should also disclose borrowings by entities such as the National Highways Authority of India, which is spending on behalf of the government. Also, while disclosure is fine, the government needs to realise extra-budgetary borrowings optically improve the fiscal deficit and lead to confusion in the marketplace, affecting the credibility of the Budget. Although the provision of funds through extra-budgetary sources does bring down the stated fiscal deficit, it still adds to the government’s liabilities. Off-Budget borrowing is also an inefficient way of funding expenditure because the government’s market borrowing cost is much lower than the interest paid on small savings instruments, for instance.
Second, the government needs to bring in greater realism in its Budget projections. One of the biggest reasons why it could not meet fiscal targets in the current year is because of unrealistic estimates. It is highly likely that it will still fall short of the revised estimates for the current year. Even for the next fiscal year, the assumption for nominal GDP growth is somewhat realistic, but the government is expecting tax buoyancy to go up to 1.2, compared with a low of 0.5 in the current year. Further, it has set an ambitious target of raising Rs 2.1 trillion through disinvestment, compared with the revised estimate of Rs 65,000 crore and actual realisation of just a little over Rs 18,000 crore so far in the current fiscal year. If the revenues fall short, which is likely, the government will have to cut expenditure or again deviate from the fiscal consolidation path. Frequent deviations from the target hurt the credibility of the government. Greater transparency and realism in government finances will increase market confidence and help bring down the borrowing cost over time.