Are India’s Budget Numbers Bogus?
(Bloomberg Opinion) -- In a few weeks, India’s finance minister will present what’s called an “interim budget” — the accounts of the year gone by, as well as his plans for the year to come. It isn’t supposed to be a regular budget because the government faces reelection in a few months; the convention is that the next finance minister gets to make the final decisions about expenditure after a new government is formed. Hoping for a second term, Prime Minister Narendra Modi is expected to lay out ambitious spending plans anyway.
The number that will draw the most attention, therefore, is the fiscal deficit: Will India stick to its plan to reduce the deficit below 3.3 percent of gross domestic product? And will it make its target for the year gone by? Modi has a reputation for fiscal prudence, so the expectation is that somehow or the other his Finance Ministry will get the numbers in line.
The problem is that the number we’ll be given is likely to be very deceptive. That’s because it won’t reflect what it’s supposed to reflect: the degree by which the government is overspending. That, in turn, is because India’s federal government — according to its own auditor, among others — is concealing its expenditure in half a dozen unprecedented ways.
In a report presented to India’s Parliament earlier this month, the Comptroller and Auditor General (CAG) argued that the cost of many subsidies, for example, was being massively understated in the budget. Payments to Indian farmers to make fertilizer affordable were being routed through “special banking arrangements” — essentially a loan from state-owned banks to cover outstanding subsidy payments. Meanwhile, the cost of buying farmers’ produce, borne by the state-run Food Corporation of India, is being paid out of what’s called the “national small savings fund,” which administers various government-run savings schemes.
The pattern is repeated in the power sector and the railways, in both of which new investment is being paid for indirectly, through borrowing by government-run agencies. As the CAG says, using “such off-budget financial arrangements ... increases the cost of subsidies, and understates the annual subsidy expenditure and prevents a transparent depiction of financial indicators for the relevant year.” In other words, its auditor has accused the Indian government of blatantly fudging the numbers.
The misuse of the small savings fund is particularly galling. This is not even public-sector earnings — it is depositors’ hard-earned cash, which they’ve given to the government to hold on their behalf. Instead of investing it responsibly, the government is giving it to the bankrupt Food Corporation of India? Worse, it’s handing out the cash to India’s chronically loss-making state-owned airline, Air India Ltd. That’s hardly a safe or sensible destination for a poor family’s savings.
This isn’t the only way in which the government has sought to conceal its expenditure. For example, it’s forcing various public-sector enterprises to buy others — essentially a way to get cash from the company in question into the government’s own kitty. Some of these forced mergers make very little sense. For example, the government is selling the Rural Electrification Corporation Corp. Ltd., which focuses on creating generation assets, to the Power Finance Corp. Ltd., which finances overall electricity infrastructure. PFC has 14,000 megawatts worth of non-performing assets on its books; surely it should be using its cash to deal with that, rather than transferring it to the government? Unsurprisingly, both the markets and ratings agencies have turned bearish on the companies.
Other public-sector companies are being made to conduct share buy-backs — especially those in various natural resource-intensive sectors such as petrochemicals and mining. Again, that shifts cash from these companies to the Finance Ministry — and reduces the amount available to them for investment. It means populist spending is happening instead of investment — exactly the kind of decision that should make the fiscal deficit look worse. Except this makes the deficit look deceptively better.
Fiscal deficits are supposed to be more than a measure of how responsible a government is with tax money. More importantly, they’re a guide to whether government borrowing is squeezing out the private sector as a destination for savings. If government spending — and borrowing — is going to be concealed in this manner, then the deficit figures aren’t going to be useful or relevant in any way.
If Modi wants to retain a reputation as a fiscal hardliner, he’s going about it the wrong way. HSBC’s analysts have already noted that their measure of net supply of government paper has gone up sharply, from 6.6 percent in 2015-16 to 8.2 percent in 2017-18. And that doesn’t take into account a lot of other off-budget borrowing that’s been scaled up recently.
The government would be far better advised to tell the truth about its profligacy. Populism costs money. And, just because the budget numbers aren’t telling you how much doesn’t mean it costs any less.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”
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