Extra-budgetary resources translate to about 2.3 per cent of the GDP. Had they been included, the FD for 2018-19 would have been 5.7 instead of 3.4 per cent

All through its tenure beginning 2014, the Modi Government demonstrated a high degree of sensitivity to millions of poor and downtrodden and spent prodigious sums on providing basic amenities such as affordable housing, electricity, sanitation, toilets, fuel and liquefied petroleum gas (LPG), health care, education etc to improve their lot. 

In the last five years, it built 1.5 crore affordable housing units and nine crore toilets, gave 2.6 crore and seven crore electricity and gas connections respectively and assured free medical treatment up to Rs 500,000 that covered 10 crore families (or 50 crore people).

Under Modi 2.0, the government has vowed to build 1.9 crore houses by 2022, give 1.4 crore electricity connections and provide safe drinking water to all homes under the ‘Jal Shakti Abhiyan’.         

It is also investing Rs 100 lakh crore in building infrastructure such as irrigation facilities, roads, national highways, expressways, railway projects, ports, airports, waterways etc that would indirectly help improve the quality of life of millions of citizens. For instance, a vast network of rural roads enables farmers to carry their produce to the market with ease and in lesser time, thereby improving price realization and augmenting income. 

These are welcome measures that have helped millions extricate themselves from poverty. Indeed, this was a major factor that enabled Modi to secure a resounding mandate to be at the helm of affairs of the country for another term. But, there’s a flip side to it, which relates to financing of these investments that are being done in an ‘opaque’ and ‘non-transparent’ manner.

During 2018-19, the National Bank for Agriculture and Rural Development (NABARD) raised Rs 30,000 crore to finance the Union Government’s rural affordable housing, sanitation and irrigation projects. The Housing and Urban Development Corporation (HUDCO) and National Housing Bank (NHB) provided Rs 20,000 crore to finance affordable urban housing projects. Likewise, the Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) raised Rs 19,331 crore to fund the Centre’s rural electrification schemes which include free electricity connections to households.

The Food Corporation of India (FCI) borrowed Rs 70,000 crore from the National Small Savings Fund (NSSF) to finance the shortfall in food subsidy allocation vis-à-vis the actual requirement (including loans taken during 2016-17 and 2017-18 which were not paid back despite the Centre’s commitment to do so. Incidentally, the FCI’s cumulative borrowing from the NSSF is around Rs 200,000 crore).

Similarly, fertiliser manufacturers borrowed Rs 33,000 crore from commercial banks under a special banking arrangement (SBA) to fund the shortfall in budget provision for fertiliser subsidy as against the actual need.

Likewise, in the case of fuel subsidy, the Public Sector Undertakings (PSUs) involved in marketing of LPG and kerosene, for instance Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) took loans to the tune of Rs 25,000 crore during 2018-19 to make up for unpaid dues by the Centre.  

In the infrastructure sector, the National Highways Authority of India (NHAI) borrowed Rs 61,000 crore for executing highways projects; Indian Railway Finance Corporation (IRFC) borrowed Rs 52,297 crore to fund implementation of railway projects and Power Finance Corporation (PFC) took a loan of Rs 97,000 crore to finance government-sector power projects.       

All these loans or Extra-Budgetary Resources (EBRs), though taken by PSUs, other state agencies and fertiliser manufacturers under SBA are on behalf of the Union Government and backed by sovereign guarantee. The Union Government is solely responsible for discharging these liabilities, yet, it decides not to reflect this on its balance sheet. As such, these debts are not included in the reported Fiscal Deficit (FD). 

All put together, the EBRs add up to a whopping Rs 407,628 crore that translates to about 2.3 per cent of the Gross Domestic Product (GDP).

Had they been included, the FD for 2018-19 would have been 5.7 per cent instead of 3.4 per cent reported in the Union Budget. During 2017-18 also, according to the Comptroller and Auditor General (CAG), the FD was suppressed by 2.4 per cent, courtesy the EBRs.

Most of the off-Budget borrowings are meant for financing current consumptions like subsidies on food, fertilisers, fuel etc or investment for a better life for millions of poor families by providing them affordable housing, free electricity connections, free gas connections, toilets and so on. These expenditure or investments don’t yield any returns for the Union Government. Even spending on infrastructure fails to generate adequate revenue to fully amortise the investment, as a sizeable chunk of the services and utilities offered through these projects are underpriced. A few cases in point being, power to farmers and poor households, subsidised rail fare for passengers and toll-free roads, etc.

This inability to make even interest payments and the ever-increasing gap between available resources and actual requirement having to be met by more borrowings, leads to debt pile-up to ‘unsustainable’ levels. What makes the scenario appalling is that this debt is not even seen on the balance sheet of the Union Government. It seems that the Centre is sitting on an ‘invisible’ fiscal volcano which could erupt without any warning, and cause widespread devastation of unimaginable dimensions in the process.

A government hiding its real state of fiscal health gives wrong signals to various stakeholders, including foreign investors. It can prompt them to review their decision to invest in India (the plan to go for overseas sovereign borrowings — announced in the Union Budget for 2019-20 — could be in jeopardy). The greater damage will be inflicted by way of further postponement of long-pending reforms in crucial sectors like food, fertilisers, power, fuel etc, which otherwise have huge potential for expenditure saving.     

For funding the `100 lakh crore investments, in infrastructure in five years, the government is banking a lot on participation of the private sector. If, the former keeps an easy option on the table (read: EBRs by PSUs and other agencies), there would be less effort in garnering the support and involvement of the latter.

There is an urgent need for bringing about transparency in funding of welfare schemes and investment in infrastructure. All loans taken on behalf of the sovereign government, irrespective of who borrows, should appear on its books and be included in the FD. This will give a true and fair view of the Centre’s finances and enable investors to make credible assessment and take informed decisions.    

The government will be forced to shed populism and restrict welfare schemes only to the most deserving. It will also have to carry out long-pending reforms in key sectors such as food, fertilisers, fuel, power etc to allow for an increased role of market forces with a view to reduce cost and enhance efficiency in operations and give subsidies only via Direct Benefit Transfer (DBT). This, together with increasing tax collection (we are still far from realizing the full potential of the Goods and Services Tax) will help in garnering the required resources for infrastructure and welfare of the poor, even while sticking to the fiscal target.      

The CAG has recommended that the government should put in place a policy framework for reining in EBRs which, amongst others, should also include disclosure to the Parliament. This lacklustre approach won’t do. Modi should go for completely doing away with the practice of off-budget financing.

(The writer is a New Delhi-based policy analyst)