Modi – government deserves commendation for showing a high degree of sensitivity to the dire need for improving the living conditions of millions of poor and down trodden – residing in both rural and urban areas – by providing all basic amenities such as affordable housing, electricity, sanitation/toilet, fuel/gas, drinking water, health care, education etc.
During the last 5 years, it has built about 1.5 crore affordable housing units, given 2.6 crore electricity connections, built around 9 crore toilets, given 7 crore gas connections and provided free medical treatment for expenses up to Rs 500,000/- [with an intent to cover 10 crore families]. Under Modi 2.0, the government has vowed to reach the target of 2 crore housing units by 2022, give a further 1.4 crore electricity connections and providing drinking water to all homes.
It is also investing heavily in building infrastructure such as irrigation, roads [including rural roads], highways/expressways, railways, ports, airports, coastal transport, waterways etc which helps in improving the quality of their life albeit indirectly. For instance, a vast network of rural roads enables farmers carry their produce from the field to the market hassle-free and in less time.
These are welcome measures and have helped millions extricate themselves out of poverty. But, there is a flip side to it. This relates to financing of these investments which are unfortunately being done in an opaque and non-transparent manner.
During 2018-19, the National Bank for Agriculture and Rural Development [NABARD] raised Rs 30,000 crore to finance the union’s rural affordable housing, sanitation and irrigation projects. The Housing and Urban Development Corporation [HUDCO] and National Housing Bank [NHB] provided Rs 20,000 crore to finance affordable urban housing. Likewise, the Rural Electrification Corporation [REC] and Power Finance Corporation [PFC] raised Rs 19,331 crore to fund Centre’s rural electrification schemes which includes free electricity connections to households.
The Food Corporation of India [FCI] borrowed Rs 70,000 crore from the National Small Savings Fund [NSSF] to fund the shortfall in food subsidy allocation vis-à-vis the actual requirement. Similarly, fertilizer manufacturers borrowed Rs 33,000 crore from commercial banks under a special banking arrangement to fund the shortfall in budget allocation for fertilizer subsidy. Likewise, in case of fuel subsidy, the public sector undertakings [PSUs] involved in marketing of LPG and kerosene borrowed Rs 25,000 crore to make up for unpaid dues from the union government.
Further, the National Highways Authority of India [NHAI] borrowed Rs 61,000 crore for executing highways project; Indian Railway Finance Corporation [IRFC] borrowed Rs 52,297 crore for railway projects and Power Finance Corporation [PFC] took loan of Rs 97,000 crore to finance the government-sector power projects.
All of the above borrowings by the state agencies and PSUs are on behalf of the sovereign government and it is only the latter which is under an obligation to service them. In some cases, the outstanding loan amount has increased as bills remain unpaid year-after-year. For instance, in case of FCI, the cumulative borrowings from the NSSF currently stand at about Rs 200,000 crore.
Ironically, these borrowings do not form part of the union’s balance sheet; these are not included in the fiscal deficit [FD]. That the extent of suppression in FD is substantial may be seen from a calculation by the Comptroller and Auditor General [CAG]. According to CAG, during 2017-18, if the off-budget borrowings had been included, the FD would have been 5.85% of the gross domestic product [GDP] as against reported 3.46%. A similar calculation for 2018-19 would yield FD of 6.1% instead of the 3.4% reported.
An overwhelming share of the off-budget borrowings are meant for financing revenue/unproductive expenditure viz. subsidies on food, fertilizers, fuel, affordable housing, free electricity connection, free gas connection, toilet etc which don’t generate return. Put simply, such spend does not yield any income stream which could be used to pay back the loans. Even in regard to productive spend such as on infrastructure, a major slice won’t yield enough revenue to fully amortize the investment as most of those services and utilities are subsidized, even free [e.g. power to farmers].
The ‘suppression/under-statement’ of sovereign borrowings gives a misleading picture about the real health of government’s balance sheet. This not only gives wrong signals to various stakeholders [including foreign investors] but also brings in a sense of complacency among the policy makers who are not inclined to undertake necessary reforms to bring about sustainable balancing of income and expenditure. There is an urgent need for changing the existing state of affairs.
All loans taken on behalf of the sovereign government who alone is obligated to pay back – irrespective of the entity taking them – should appear on its books and be a part of its fiscal deficit. This will increase transparency and help stakeholders including rating agencies make a credible assessment of union’s finances.
The political establishment will be forced to shed populism and restrict welfare schemes only for the most deserving. It will also have to carry out long-pending reforms in key sectors such as food, fertilizers, fuel, power etc to allow for increased role of market forces with a view to reduce cost and enhance efficiency in operations and give subsidies only via direct benefit transfer [DBT]. The government will also need to involve private sector in building infrastructure which at present is completely missing [courtesy, reckless funding via off-budget borrowings using union’s sovereign powers].
To conclude, while, the government must take all necessary steps to help the poor and downtrodden for leading a better life, funding of welfare schemes needs to be done in a transparent manner and at the same time ensuring that the fiscal balance is not unduly disturbed. In this regard, it may even consider putting in place a policy framework for reining in off-budget financing, which, amongst others, should include disclosure to Parliament – as recommended by the CAG.