In the Interim Budget presented by the finance minister in-charge, Piyush Goyal on February 1, 2019, the government reported a minor slippage of 0.1% in fiscal deficit [FD] for 2018-19 against the target of 3.3% of GDP [gross domestic product]. For 2019-20 also, the FD has been pegged at 3.4%.
Going by the fiscal consolidation road-map which required the centre to reach 3% mark by 2018-19, already, it is behind schedule. Even the manner of achieving the mentioned numbers raises doubts about the credibility of the efforts.
In regard to proceeds from disinvestment of shares in public sector undertakings [PSUs], the government had set a target of Rs 80,000 crore for 2018-19. A look at the break-up shows heavy reliance on (i) sale of its shareholding in a PSU to another and (ii) share buyback by the PSU. The sale of its 52.6% share in Rural Electrification Corporation [REC] to Power Finance Corporation [PFC] is estimated to fetch Rs 14,000 crore. Likewise, the buyback of shares by Oil and Natural Gas Corporation [ONGC] and Coal India Limited [CIL] etc is expected to garner about Rs 12,000 crore.
During 2017-18 also when it got a record over Rs 100,000 crore from disinvestment proceeds [against a target of Rs 72,500 crore], over Rs 30,000 crore was mobilized from sale of its majority stake 51% in Hindustan Petroleum Corporation Limited [HPCL] to ONGC. Further, it garnered Rs 5340 crore via buyback of its shares by PSUs [during 2016-17, this was much higher at Rs 19,000 crore].
In principle, disinvestment involves selling shares to the public so as to result in transfer of the ownership from the government to individuals or other private [albeit corporate] entities. However, in case of share transfer from one PSU to another, the ownership and control of shares remains with the government. On the other hand, buyback merely results in destruction of the shares.
The use of these instruments erodes the internal resources of the PSUs which has a debilitating effect on their ability to fund expansion, modernization and growth. Imagine, ONGC being compelled to borrow money to finance acquisition of government’s stake in HPCL when, its own projects are crying for funds.
The government has also taken recourse to extra-budgetary resources [EBRs] for funding the non-revenue generating welfare schemes viz. the National Food Security Act [NFSA]. Swachh Bharat, rural electrification, affordable housing, higher education etc. The EBRs to fund these schemes were 2016-17: Rs 77,250 crore; 2017-18: Rs 224,000 crore and 2018-19: Rs 274,000 crore. A major chunk was meant to fund the widening gap between the budgetary allocation and the actual resource needs for the NFSA.
Under NFSA, the excess cost of procurement, handling and distribution over the selling price to the beneficiaries viz. Rs 1/2/3 per kg for coarse cereals/wheat/rice is reimbursed to the Food Corporation of India [FCI] as subsidy. During 2017-18/2018-19, FCI borrowed Rs 211,000 crore /Rs 196,000 crore on behalf of the government. For 2019-20, this is budgeted at Rs 178,000 crore.
On October 24, 2017, finance minister, Arun Jaitely had announced a Rs 211,000 crore plan to recapitalize public sector banks [PSBs] whose capital had eroded due to their high non-performing assets [NPAs]. This included Rs 135,000 crores by way of so called ‘recapitalization bonds’ besides Rs 58,000 crores via raising capital from the market and Rs 18,000 crores as budgetary support. The bonds are issued by the centre and the interest there upon would be adjusted against future dividend payments by banks.
The actual borrowings through recapitalization bonds could be even higher than Rs 135,000 crore as any shortfall in fund raising by the PSBs [inevitable in view of their weak balance sheets, hence lukewarm interest among buyers] needs to be made up.
For fertilizer subsidy – being the excess of cost of production and distribution over low selling price [controlled] reimbursed to the manufacturers – the budget allocation has been consistently short of the requirement. During 2018-19, the shortfall would be about Rs 45,000 crore which is not covered in the budget provision of Rs 75,000 crore for 2019-20. Being under no obligation to pay interest on delayed payments and extant method of accounting on ‘cash basis’ viz. recording expenses when payment is made – enables it to persist with this unhealthy practice year-after-year.
Even with regard to petroleum subsidy [LPG and kerosene], as against budget allocation of Rs 25,000 crore during 2018-19, the estimated requirement is about Rs 38,000 crore. This leads to a carry-forward of Rs 13,000 crore to be paid to oil marketing companies in the public sector viz. IOCL/BPCL/HPCL.
Be it borrowings by the FCI and other state agencies for running welfare schemes, issue of bonds [to recapitalize PSBs] or delaying payments to fertilizer manufacturers and oil PSUs running into hundreds of thousand crore, these are ‘off-balance sheet’ items which do not get reflected in the budget. These are the liabilities/dues of the union government yet, these are not captured in the fiscal deficit [FD]. As a consequence, the FD is artificially suppressed.
Likewise, the proceeds emanating from sale of shares of one PSU to another as also share buyback by state enterprises [instead of selling to the public] seek to artificially lower the deficit.
The reported deficit may give an impression that India’s macro-economic fundamentals are sound but in reality it may not be so even as the Union’s finances continue to be inherently vulnerable. The window dressing of the accounts by Modi – dispensation is reminiscent of the practice followed by the erstwhile UPA – regime but with one major difference.
In sharp contrast to UPA when leakages were rampant, Modi is ensuring that the benefit of bloated expenses on welfare schemes is reaching the beneficiaries in full. However, a lot more needs to be done to curtail/optimize the expenses by undertaking reforms – especially in food and fertilizers – and maintaining the tempo of higher tax [both direct and indirect] revenues. A re-look at divestment strategy is also needed.