The portrait of Mahatma Gandhi is displayed on an Indian 2000 rupee banknote in an arranged photograph in Bangkok, Thailand. (Photographer: Brent Lewin/Bloomberg)

CAG Questions Use Of Off-Budget Financing By Government

India’s national auditor flagged off the government’s increasing use of financing outside the budget, a practice that allows it to overshoot expenditure while maintaining the budget deficit targets.

“The government has increasingly resorted to off-budget financing for revenue as well as capital spending,” the Comptroller and Auditor General said in its report on compliance with the Fiscal Responsibility and Budget Management Act tabled in Parliament on Tuesday. “In terms of revenue spending, off-budget financing was used for covering deferring fertiliser arrears/bills through special banking arrangements; food subsidy bills/arrears of FCI (Food Corporation of India) through borrowings and for implementation of irrigation scheme (Accelerated Irrigation Benefit Programme) through borrowings by NABARD under the Long-Term Irrigation Fund.”

Carry Over Of Subsidy Spends

Flagging off the use of off-budget financing to push forward subsidy expenditure, the auditor said the “government adopted off-budget means of financing the subsidy arrears, thereby deferring the payment in the relevant financial year and in the process also incurring additional cost by way of interest payments”.

The CAG, citing the instance of the Fertiliser Ministry, said it had seen subsidy arrears of Rs 39,000 crore build up by 2016-17. The same has been the case for the last few years, with the highest proportion of carry over reported in 2013-14.

CAG Questions Use Of Off-Budget Financing By Government

This impacts liquidity of companies operating in the area. To overcome these liquidity issues, special banking arrangements are put in place with public sector lenders to provide funding against subsidy dues.

In the case of food subsidies, arrears had built up to Rs 81,303 crore by 2016-17, according to the report. To cover financial requirements arising out of the subsidy arrears, the FCI resorts to various methods in different years such as bonds (Rs 13,000 crore), unsecured short-term loans (Rs 40,000 crore) and National Small Saving Funds loans (Rs 70,000 crore), among others.

“It is evident that there was an increase of about 350 percent in carried-over subsidy arrears in the five years preceding 2016-17 that require financing from a number of methods, including very high interest cash credit facility which increases actual cost of this subsidy substantially,” the report said.

CAG Questions Use Of Off-Budget Financing By Government

Not A New Trend?

The carry forward of subsidy payments into subsequent years has been a practice adopted by most governments over the years, said former finance secretary S. Narayan. He advises watching for the proportion of subsidy carried over.

“If you look at pattern of fertilider subsidy, there has been carry over from 1984 onwards. The carry overs might be small or large, but I cannot recall a single year where on 31st of March all fertiliser subsidies have been settled. So, carry over has been going on from quite some time,” Narayan told BloombergQuint in an interview. He explained that some of this is due to the administrative process such as delays in filing claims etc.

He added that it may be prudent for a policy to be put in place which determines an acceptable level of carry over for subsidy payments.

Just like you have FRBM, you should have a cap for subsidy carry overs particularly for food. There should be a cap on food and fertiliser and that number can be decided by the government.
S. Narayan, Former Finance Secretary

Focus On Debt-GDP

The CAG, in its report, also highlighted that total liabilities of the government are understated if off-balanchesheet items are not taken into account.

“Taking into account the understatement of public account liability of Rs 7,63,280 crore, total liability of the central government at the end of the financial year 2016-17 would be Rs 76,69,545 crore, which is 50.5 percent of GDP rather than 45.5 percent against the projection of 47.10 percent in MTFP (medium-term fiscal policy) statement 2016-17,” it said.

This, Narayan, said is what eventually matters.

“We have to look at total debt of the government with reference to GDP. Normally, we work on overall 50 percent debt GDP ratio. But they are saying that you have gone above that,” Narayan said while adding that government’s can put correctives in place to ensure that overall debt levels and fiscal deficit levels are maintained in line with the FRBM requirements.

Putting Correctives In Place

The auditor suggested that the government should consider putting in place a policy framework for off-budget financing and disclose to Parliament—

  • The rationale and objective of off-budget financing, its quantum and budgetary support under the same programme, instruments and sources of financing, and strategy for debt servicing of off-budget financing.
  • Details of off-budget financing undertaken during a financial year by various departments and companies substantially owned by the government.
  • Details of off-budget borrowings through disclosure statements in the Union Budget as well as in accounts.

Besides, the CAG said the government could not meet its mid-year fiscal deficit and revenue deficit targets of 70 percent of budget estimate for 2016-17, despite relaxing it twice. The targets were revised twice from 45 percent in 2004-05 to 60 percent in 2012-13, and then to 70 percent in 2015-16.

The factors responsible for deviations in expenditure and receipts, and specific corrective measures, which the government had to take during the year, were not presented in the statement to Parliament, according to the report.

The auditor also recommended that the government must ensure explicit disclosures of all transactions having fiscal implications and avoid presenting mismatched figures.

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