The Union Government wants to ‘pre-pay’ the remaining off-budget borrowings of Rs 170,000 crore over a reasonable period of time

Off-budget borrowings or extra-budgetary resources (EBRs) - as these are called in budget parlance — are those borrowings that are raised by public sector undertakings (PSUs) and other agencies of the government such as Food Corporation of India (FCI), Housing and Urban Development Corporation (Hudco), Power Finance Corporation (PFC), NABARD etc to fund its schemes for which repayment of entire principal and interest is done from the Union Budget. The Centre had EBRs close to Rs 670,000 crore by the end of 2020-21.

If all obligations about such borrowings are met by the Union government then why does it not take these on its balance sheet (BS) instead of riding piggyback on its agencies/PSUs? The reason is by not borrowing itself and hence not reflecting on its BS, it can show a lower fiscal deficit (FD) to the extent of EBRs. This is an unhealthy practice as artificially lowering the FD, breeds complacency regarding efforts needed to maintain fiscal discipline. The Comptroller and Auditor General (CAG) of India and the 15th Finance Commission had red-flagged the EBRs and had urged the Centre to come clean on these.

In the Budget for 2020-21, Finance Minister Nirmala Sitharaman candidly acknowledged their existence and mentioned these in an annexure. But, mere mention in the budget documents is of no use unless EBRs are reflected in Union’s BS and FD captures all borrowings of the Centre including EBRs. It should also commit not to take recourse to such borrowings in future.

While presenting the revised estimate (RE) for 2020-21 and budget estimate (BE) for 2021-22, Sitharaman did precisely this. Of the Rs 670,000 crore outstanding EBRs as of March 31, 2021, it brought about Rs 500,000 crore into the BS. A big slice of this Rs 427,000 crore was the loans raised by the FCI towards food subsidy arrears from 2016-17 to 2020-21 from the National Small Saving Fund (NSSF). The balance was mainly towards fertilizer subsidy arrears. Under the National Food Security Act (NFSA), around 820 million beneficiaries receive food grains, primarily wheat, rice and coarse cereals, at the heavily subsidized price of Rs 2, Rs 3 and Rs 1 per kg, respectively, which is a fraction of the cost of procurement, handling and distribution. The task is performed by the FCI et al on behalf of the Government, which reimburses the shortfall in realization from sale vis-à-vis the cost to the former as food subsidy.

Pending its receipt, the FCI manages its costs by availing cash credit from a consortium of Banks, short-term loans (up to 90 days), ways and means advance (WMAs), etc. The costs associated with such financing including interest costs and service charges etc are also included in the food subsidy. As a normal practice, the Centre is expected to release all of the subsidy dues by the end of the relevant financial year. But, before 2020-21, this wasn’t happening

The Government was invariably keeping a portion of the reimbursement amount due to the FCI pending year after year. The extant method of accounting expenses on a cash basis, i.e., when actual payments are made, enabled it to do this. This forced the FCI to borrow the “unpaid amount” from the NSSF - an undesirable and unconscionable practice. Small savings need to be deployed in avenues that generate returns, not for meeting revenue expenses. Since 2016-17, when the FCI started borrowing from the NSSF, as of March 31, 2020, it owed a staggering Rs 300,000 crore to the Fund.

Together with Rs 127,000 crore borrowed during 2020-21, this went up to Rs 427,000 crore. At the year's end, this entire amount was transferred to the books of the Centre and fully paid from the appropriation made in the RE. During 2021-22, FCI raised around Rs 61,000 crore from the banks which was paid by the Centre at the year's end.

During 2022-23, initially, the FCI had intended to raise around Rs 87,500 crore from the banks which was eventually scaled down to Rs 55,000 crore. The Centre extinguished this liability at the year's end. Unlike in the past (before 2020-21), there wasn’t any need for the FCI to carry on with the load on its books. But, things could be different during the current year.

During 2023-24, as per the government’s assessment, the FCI may have to borrow a whopping Rs.145,000 crore to meet its working capital requirements. This is to be expected as this year’s allocation for food subsidy at Rs 197,000 crore is Rs 90,000 crore less than the RE for 2022-23 at Rs 287,000 crore. While, the cut may be due to the discontinuation of Pradhan Mantri Garib Kalyan Anna Yojana or PMGKAY (under it, free food was supplied to all the 820 million beneficiaries under NFSA) from January 1, 2023, two other decisions increase the subsidy requirement.

First, from January 1, 2023, the government merged the free part of PMGKAY with the regular food security scheme under NFSA, which meant that instead of Rs 2, Rs 3 and Rs 1 per kg for wheat, rice and coarse cereals beneficiaries were paying earlier, now they pay ‘nil’. Second, this free food scheme (albeit under NFSA) which was to cease on December 31, 2023, will now continue till June 30, 2024, thus leading to higher payments during the last three months i.e. January 1-March 31, 2024 of the current FY.

Since fiscal calculations have been made with BE of Rs 197,000 crore against a much higher likely actual, the government won’t be able to release all subsidy dues of FCI. This could lead to a repeat of what happened before 2020-21.

In fertilizers, before 2020-21, a large chunk of subsidy payments to manufacturers and importers - being the excess of the cost of supply over the low price they are asked by the Centre to sell to farmers - were kept pending. During 2020-21, in the RE it gave Rs 67,000 crore to clear all the arrears from previous years. In the succeeding two years, it paid the entire subsidy dues from the budget. However, the scenario during 2023-24 could be different.

For the current year, BE for fertilizer subsidy is Rs 175,000 crore which is Rs 80,000 crore less than RE for 2022-23 at Rs 255,000 crore. Even though international prices of fertilizers and raw materials used in their production are significantly lower than last year, we have to keep our fingers crossed. This is all the more because Union Minister of Health and Family Welfare and Chemicals and Fertilizers Mansukh Mandaviya has indicated that around Rs 46,000 crore more would be needed over and above the BE.

The impending excesses in food and fertilizer subsidy payments from the BE could lead to slippages in the FD target. But, the government doesn’t want that to happen. So, we could see a return of EBRs. As for the intent of the government to clear the remaining EBRs of Rs 170,000 crore (these are mainly the bonds issued by Hudco, Nabard etc. to raise funds for its projects for irrigation, housing etc.), this would also lead to further slippage in FD. So, the talk of extinguishing remaining EBRs is plain rhetoric.

(The writer is a policy analyst. The views are personal)