Taking a ‘fair’ and ‘realistic’ view of all receipts and expenditure of the Govt, its fiscal deficit is turning out to be almost double the three per cent target sought by the NK Singh panel
Having achieved the fiscal deficit (FD) target for three years in a row, the Narendra Modi Government missed it in 2017-18 and 2018-19. During 2017-18, the actual FD expressed as a percentage of the Gross Domestic Product (GDP) was 3.5 per cent against the target of 3.2 per cent. For 2018-19, the then Finance Minister, Arun Jaitley had set a target of 3.3 per cent as against three per cent sought by a committee under NK Singh, former Expenditure Secretary and current Chairman of the 15th Finance Commission.
The committee was set up in 2016 to review the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, with a mandate to revamp it and recommend a path for the next six years. It advocated a FD target of 2.5 per cent, revenue deficit 0.8 per cent, combined Centre-State debt ceiling of 60 per cent and a Central debt ceiling of 40 per cent for 2022-23. It recommended three per cent FD for 2018-19. It also allowed the Government to breach the target in case of “far-reaching structural reforms with unanticipated fiscal implications.”
Vide the Finance Bill, 2018-19 the Government amended the FRBM Act to allow it to achieve three per cent FD by 2020-21 instead of 2018-19 recommended by the committee. Further, it sought the debt limit of 40 per cent by the Centre (60 per cent for Centre and States) to be reached by 2024-25 instead of 2022-23 mandated by the committee.
During 2018-19, the Government posted 3.4 per cent (against the target of 3.3 per cent), that too by taking recourse to what is termed as “financial engineering.” It paid Rs 60,000 crore less to the Food Corporation of India (FCI) towards food subsidy as reimbursement of the excess of the cost of procurement, handling and distribution over the sale price to the beneficiaries under the National Food Security Act (NFSA). It paid Rs 32,000 crore less to State-owned oil marketing companies (OMCs) viz. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and so on, for selling LPG and kerosene at subsidised prices. Likewise, short payments to manufacturers for fertiliser subsidy were about Rs 40,000 crore.
The above three so-called “deferred payments” add up to Rs 1,32,000 crore. In addition, public undertakings like the National Bank for Agriculture and Rural Development (NABARD), Housing and Urban Development Corporation (HUDCO), National Housing Bank (NHB), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), National Highways Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC) borrowed on behalf of the Government to fund welfare schemes such as rural and urban affordable housing, sanitation and irrigation projects, rural electrification schemes (including free electricity connections to households) highways and railway projects. Termed Extra-Budgetary Resources (EBRs), these totalled Rs 280,000 crore.
All put together, the money, a whopping Rs 412,000 crore, should have been paid by the Government from its Budget. But it decided to make other entities pay for it or borrow on its behalf. This translates to about 2.3 per cent of the GDP.
Including this, the FD for 2018-19 would have been 5.7 per cent instead of 3.4 per cent reported in the Budget. During 2017-18 also, according to the Comptroller and Auditor General (CAG), the FD was suppressed by 2.4 per cent, courtesy EBRs.
The current year for which the FD target is kept at 3.3 per cent (same as the target for 2018-19), will also end up with a repeat of the scenario in the previous two years.
Let us look at how slippage from the target is likely to pan out. First, at the time of the Budget presentation, the FD projection at 3.3 per cent or about Rs 700,000 crore in value term was based on a nominal GDP growth of 12 per cent — from Rs 188,00,000 crore during 2018-19 to Rs 211,00,000 crore during 2019-20. Against this, the actual growth is estimated to be 7.5 per cent implying a GDP of about Rs 202,00,000 crore during 2019-20. Even if the deficit were to be kept at Rs 700,000 crore, as percentage of the lower than initially projected GDP or Rs 202,00,000 crore (or “denominator” effect), this will be 3.46 per cent.
That apart, even in absolute terms, the deficit is expected to be much higher than Rs 700,000 crore. First, given the slow pace of tax collection so far till November 2019 — both direct and indirect — and little prospect of any major recovery in the remaining four months, the collection during the year is expected to fall short of the Budget estimate by about Rs 200,000 crore. Second, the proceeds of disinvestment are expected to miss the target by a whopping Rs 80,000 crore (the Budget estimate of Rs 1,05,000 crore was based largely on strategic sale of BPCL, Air India and so on which is unlikely to materialise before March 31, 2020).
So, the total shortfall in collection — on both these counts — adds up to Rs 2,80,000 crore. Add to this, fertiliser subsidy arrears of about Rs 60,000 crore (according to the industry body Fertiliser Association of India); unpaid food subsidy bills of the FCI at Rs 60,000 crore and about Rs 30,000 crore as unpaid fuel subsidy bills to OMCs. That takes the grand total to Rs 430,000 crore. This will push the actual deficit to Rs 1130,000 crore which translates to 5.6 per cent. This does not capture the EBRs used to fund the Government’s welfare schemes. If, that is included then, the deficit would be even higher.
Taking a “fair” and “realistic” view of all receipts and expenditure of the Union Government, its fiscal deficit is thus turning out to be almost double the three per cent target handed out by the NK Singh Committee. Though, in the balance sheet, it may still show a figure close to the target and brandish that it is sticking to the fiscal consolidation glide path, that is made possible through an act of skullduggery. But, this is not a sustainable situation.
Apart from the spillover effect on PSUs, other agencies of the Government such as the FCI and others, through whom subsidy is administered (e.g. fertiliser manufacturers) who are made to bear the brunt by way of liquidity problems, interest cost, recurring losses and so on, the most serious damage is done due to the “complacency” this breeds with regard to fiscal management. When, the target is achieved without actually bringing about reduction in expenditure or boosting revenue or a combination of both, why would our planners and policymakers take credible measures in that direction?
For instance, a major reason for the ballooning subsidy on urea is its ridiculously low MRP (the current price is just 10 per cent higher than it was in 2002). This is despite the recommendation of the Expenditure Reforms Commission (ERC) in 2000 to increase steps to eliminate the gap between the cost and price over five years. No action on this front implies increasing subsidy in the face of ever-increasing cost. But, by rolling over payments year-after-year and showing less in the Budget, the mandarins in the Finance Ministry skirt the real issue.
Likewise, by not releasing food subsidy dues to FCI and showing less expenditure in the Budget, they run away from dealing with the real factors viz. ridiculously low selling price of food grain, high inefficiency in handling operations by agencies and giving millions of non-deserving access to the food security system.
The same holds for oil subsidy (mainly LPG and kerosene).
In the backdrop of the slowdown in growth, even as commentators are advocating some leniency in the fiscal consolidation drive, the reality is that already, there is substantial relaxation though it is going unrecognised. Under the “business as usual” scenario, the economy may face catastrophic consequences. The Government should act before it is too late. For that, it should recognise that the problem exists and stop fudging its accounts. But, this by itself won’t help.
This has to be followed up by some hardcore reforms such as removal of controls in key areas such as fertilisers, food, fuel and power, giving subsidy through direct benefit transfer (DBT), substantial pruning of the number of beneficiaries under welfare schemes and removing inefficiencies at various levels in the supply chain. This will require shedding populism and cracking down on vested interest (especially corrupt politicians and bureaucrats who are gaining a lot from the existing dispensation) with alacrity.
Modi should show the gumption to crack the whip. Having an absolute majority in the Parliament and four-and-a-half years to go, he can afford to do. Even so, time and again, he has reiterated his commitment to do things in the overall national interest even if it leads to a political backlash. Hence, he should go ahead.
(The writer is a New Delhi-based policy analyst)
