Having achieved the fiscal deficit target for three years in a row viz. 2014-15/2015-16/2016-17, Modi – government missed it in the following two years 2017-18 and 2018-19. During 2017-18, the actual FD expressed as percentage of gross domestic product [GDP] was 3.5% against the target of 3.2%. For 2018-19, the then finance minister, Arun Jaitely Jaitely had set a target of 3.3% as against 3% sought by a committee under Mr NK Singh, former expenditure secretary and currently, Chairman, 15th Finance Commission.
The committee was set up in 2016 to review Fiscal Responsibility and Budget Management [FRBM] Act [2003] with a mandate to revamp the Act and recommend a glide path for the next six years. It recommended fiscal deficit [FD] target of 2.5%, revenue deficit 0.8%, combined centre-state debt ceiling of 60% and central debt ceiling of 40% for 2022-23. It recommended 3% 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 3% FD by 2020-21 instead of 2018-19 recommended by the committee. Further, it sought the debt limit of 40% by the Centre [60% 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% [against target 3.3%] 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] etc for selling LPG [liquefied petroleum gas] and kerosene at subsidized price. Likewise, short payments to manufacturers for fertilizer subsidy were about Rs 40,000 crore.
The above three so called ‘deferred payments’ add up to Rs 132,000 crore. Then, public sector undertakings [PSUs] viz. 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], Indian Railway Finance Corporation [IRFC] borrowed funds on behalf of the sovereign government to fund welfare schemes such as rural affordable housing, sanitation and irrigation projects, affordable urban housing, rural electrification schemes [including free electricity connections to households] highways and railway projects. Termed extra-budgetary resources [EBRs], these were Rs 280,000 crore.
All put together, the money that should have been paid by the government from its budget but decided to make other entities pay for it or borrow on its behalf was a whopping about Rs 412,000 crore [132,000+280,000]. This translates to about 2.3% of the GDP.Including this, the FD for 2018-19 would have been 5.7% instead of 3.4% reported in the budget. During 2017-18 also, according to the Comptroller and Auditor General [CAG], the FD was suppressed by 2.4%, courtesy EBRs.
The current year for which the FD target is kept at 3.3% [same as the target for 2018-19], will also end up with a repeat of the scenario in previous two years. Let us look at how slippage from the target is likely to pan out.
First, at the time of budget presentation, the FD projection at 3.3% or about Rs 700,000 crore in value term was based on nominal GDP growth of 12% – 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% implying 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 lower than initially projected GDP or Rs 202,00,000 crore [or ‘denominator’ effect], this will be 3.46%.
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 4 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 is expected to miss the target by a whopping Rs 80,000 crore [the budget estimate of Rs 105,000 crore was based largely on strategic sale of Bharat Petroleum Corporation Limited (BPCL), Air India etc which is unlikely to materialize before March 31, 2020].
So, the total shortfall in collection – on both these counts – adds up to Rs 280,000 crore. Add to this fertilizer subsidy arrears about Rs 60,000 crore [according to the industry body Fertilizer Association of India]; unpaid food subsidy bills of FCI 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 takes actual deficit to Rs 1130,000 crore which translates to 5.6%. This does not capture the EBRs used to fund 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 3% target handed out by 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 skulduggery. But, this is not a sustainable situation.
Apart from the spill-over effect on PSUs, other agencies of the government such as FCI and others through whom subsidy is administered [e.g. fertilizer manufacturers] who are made to bear the brunt by way liquidity problems, interest cost, recurring losses etc, the most serious damage is done due to the ‘complacency’ this breeds in 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 policy makers take credible measures in that direction?
For instance, a major reason for ballooning subsidy on urea is its ridiculously low MRP [current price is a mere 10% higher than it was in 2002]. This is despite the recommendation of Expenditure Reforms Commission [ERC] in 2000 to increase in steps to eliminate the gap between the cost and price over 5 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 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 access of millions of non-deserving to the food security system. The same holds for oil subsidy [mainly LPG and kerosene].
In the backdrop of 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 un-recognized. 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 recognize that the problem exists and stop fudging its accounts. But, this by itself won’t help.
This has to be followed up by some hard core reforms such as removal of controls in key areas such as fertilizers, food, fuel, power etc, 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.