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Budget 2019: Why have deficit target if it doesn’t reflect reality?

The Financial Express

When India first embarked upon the path of fiscal responsibility through the FRBM Act, a 3% fiscal deficit target was set for FY09. It speaks volumes for how various governments have decided not to adhere to this that, a decade later, in the FY19 budget, the fiscal deficit target is 3.3% of GDP. It is obviously true that a single-digit fixed number is a bad idea, the deficit needs to be counter-cyclical so that it can be low in years of good growth and high when growth needs to be stimulated through more government expenditure. After all, the deficit in itself is not as important as the issue of the government crowding out private sector borrowers; this happens only in years of high growth when private expenditure is also buoyant. The reason why India has never been able to do this, though, is precisely because no government has compressed expenditure and hence the deficit in high-growth years; only when this happens is there scope to raise the deficit in a low-growth year. That is why, while the NK Singh panel has allowed a slightly higher deficit in a really bad year, the deficit target remains a single number.

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What is more problematic, as the CAG has pointed out in the past as well, is that the government of the day makes a mockery of this number by either doing a lot of off-budget financing or by simply deferring payment of various bills such as those of the Food Corporation of India (FCI) for its food subsidy operations. And when the NDA came to power, another chosen off-budget vehicle was loans from other PSUs like LIC LIC has, from time to time, extended loans to the Railways for its capex. Since this money has to be repaid eventually, it will impact spending in that year, so it is better to have clean accounting every year. As a result of this, CAG says, the Central government s total liability at the end of FY17 was not the 45.5% of GDP that was reported but a much higher 50.5%.

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In the case of fertilisers, CAG points out, an expenditure of Rs 26,417 crore was carried over in FY13 and this rose to Rs 43,356 crore in FY16, before falling a bit to Rs 39,057 crore in FY17; to put the FY17 number in perspective, it was 56% of the Rs 70,100 crore expenditure mentioned in the budget. Indeed, since the fertiliser companies weren t paid on time by the government, the government had to arrange loans for them from PSU banks through what is called a Special Banking Arrangement. In the case of FCI, arrears rose from Rs 23,427 crore in FY12 to Rs 81,303 crore in FY17; in FY17, the arrears were slightly higher than the budgeted expenditure of Rs 78,335 crore. And, as FE reported, FCI had to borrow Rs 1.2 lakh crore from the small savings scheme in FY18 to help cover its subsidy arrears of Rs 1.35 lakh crore. For FY19, FE reported that the Central government had lined up extra-budgetary borrowing plans of Rs 1.7 lakh crore via FCI, Nabard, REC, PFC, etc, a number that was up 110% from that in FY18. Not surprisingly, the CAG has recommended the government come up with a policy framework for off-budget financing and report the number to Parliament. If every government is going to try and beat the FRBM target by withholding subsidy payments or by using off-budget borrowing, then why even bother with an FRBM target and pretending to achieve it each year.