In his maiden budget for 2014-15 presented on July 10, 2014, finance minister, Arun Jaitely had announced setting up of an expenditure management commission (EMC) to recommend a road- map up for rationalizing and phasing out major subsidies. As a follow up, on September 4, the government constituted the EMC under chairmanship of Dr Bimal Jalan.
The commission’s mandate puts under scanner government’s spending on all its programmes and schemes, procurement from defence to office items besides the methodology for counting receipts and expenditure. It is expected to recommend measures for utilization of allocated funds in the most cost effective manner.
While addressing the just concluded ET Global Business Summit, Jaitely informed that the recommendations of the commission made in its interim report will form the basis for subsidy reforms – with emphasis on rationalization and elimination of leakages – to be announced in the budget for 2015-16.
The commission has reportedly favoured switching over to accrual based accounting of receipts and expenses from extant cash-based accounting method. It has also expressed its strong disapproval of the practice of deferring/postponing major payments especially subsidies to the following year.
These ideas need to be viewed in the backdrop of successive governments in the past frequently resorting to ‘window dressing’ to camouflage real expenses and revenue inflows. So, how is the extant system amenable to window dressing? How will the proposed system help in putting a stop to this?
Under the existing dispensation of accounting on cash basis, income/receipt is counted when the cash (or a cheque) is received and expenses are recorded when actually paid. On the other hand, under accounting on accrual basis, transactions are recorded when they happen irrespective of when the money is received or paid.
The government spends hundreds of thousands crores on major subsidies viz., fertilizers, fuel and fuel every year (e.g., Rs 245,000 crores in 2013-14 & Rs 251,000 crores budget provision for 2014-15). Payments are made as reimbursement to manufacturers/agencies who sell these products at ‘controlled’ prices which are lower than cost of production/procurement, handling and distribution.
Food Corporation of India (FCI) and other agencies involved in supply and distribution of food grain and implementation of welfare schemes sell food to beneficiaries under public distribution system (PDS) and targeted PDS (TPDS) at prices much lower than the cost. The government reimburses the differential amount as subsidy.
In fertilizers, government directs manufacturers to sell urea at a low statutorily controlled price. The excess of production & distribution cost of each producing unit over this is reimbursed as subsidy under new pricing scheme (NPS). Producers of complex fertilizers get subsidy at uniform rate under nutrient based scheme (NBS).
In oil too, public sector undertakings viz., IOC, HPCL & BPCL sell LPG and kerosene at low prices as directed by government. Consequential under-recoveries [computed as excess of import parity price (IPP) over sale price] are met partly from subsidy and balance vide discount on crude sale by ONGC and OIL. Diesel was also covered by this dispensation till October, 2014, when it was decontrolled.
Routing of subsidy through fertilizer manufacturer/oil companies/FCI et al gives government infinite leverage in deciding when to release funds. Ironically, even as the former extends subsidy (inherent in selling product at low price) to beneficiaries round the clock throughout the year on every unit of material sold, the latter makes reimbursements at its sweet will. The absence of norms in this regard only heightens scope for discretion.
In fertilizers, the extant guidelines require that for sale made in any given month, government should release payments within 45 days of submission of claim by the manufacturer. But, this stipulation is observed more in breach. The fact that there is no provision for interest on delayed payments renders this norm infructuous. In other areas, even norms on paper do not exist.
It is therefore no surprise that successive governments have got used to deferring payments to succeeding year in a bid to show healthy balance sheet in the relevant year. Whereas, in 90s, amounts deferred used to be in hundreds of crores, in first decade of 21st century and now in to second, these run in to several thousand crores!
For instance, in fertilizers during 2008-09 amounts deferred was an unprecedented Rs 50,000 crores. In 2011-12, while this declined to around Rs 17,000 crores, thereafter it scaled up to Rs 32,000 crores in 2012-13 and further to Rs 38,000 crores in 2013-14. In oil and food, subsidy payments rolled over in 2013-14 were Rs 43,500 crores and Rs 40,000 crores respectively.
All this has taken a heavy toll of fertilizer manufacturers and oil PSUs by way of serious liquidity problems, huge interest burden denting profits and even suspension of production. This has discouraged investment in capacity build up especially in fertilizers leading to heavy dependence on imports and increased subsidy outflow as import come at higher cost.
The extant method of cash accounting by permitting recording of expenses when actually paid acts as a cover up for all these omissions and commissions. The mandarins in finance ministry first estimate the likely fiscal deficit vis-a-vis the target and then determine how much payments to make under subsidies on fertilizers, food and oil so as to reach the target. The true picture about state of government finances remains shrouded in a thin veil.
This veil can be lifted only if the government acts on the suggestion of the commission to switch over to accrual based accounting of receipts and expenses. This will leave no scope whatsoever for fudging of accounts as expenses will necessarily have to be recorded in the year transaction has happened regardless of actual payment.
The government will then be compelled to make payments to manufacturers and oil PSUs in time (as it would have nothing to gain from fudging) thereby putting an end to the nightmare the latter have been going thru for decades.
Hopefully, Modi government will take a call on this major expenditure reform in the budget for 2015-16.