Relevance: Mains: Current affairs analysis
News Related
- The fiscal deficit numbers mentioned in the Union Budget for 2019–20 are doubtful, given that the total liabilities of the government are understated as the off-budget finance items are excluded from the fiscal deficit calculations.
What is Off-budget financing
- Off-budget financing is a tool being used to defer expenditure to subsequent years, and the modality of repayment of borrowing is not spelt out.
- They are not accounted for in the current budget because they are future liabilities and not current liabilities. They are, however, part of the overall debt of the government.
- Successive governments have used this route to defer some of their liabilities and exclude them from the fiscal deficit calculations.
- Such off-budget financing creates future liability and increases the subsidy cost due to interest payments. Of late, the central government has increased off-budget borrowings to fund capital and revenue expenditure such as food and fertiliser subsidy arrears.
CAGs Report on Off-budget financing
- Comptroller and Auditor General’s (CAG) report mentioned that the off-budget financing was being used to defer fertiliser arrears, food subsidy bills, and outstanding dues of the Food Corporation of India (FCI) through borrowings.
- Off-budget financing was used for deferring the fertiliser bills through special banking arrangements
- Food subsidy bills of the FCI was being deferred through bonds, unsecured short-term loans, Borrowings of NABARD under the Long-Term Irrigation Fund for implementation of irrigation schemes (Accelerated Irrigation Benefits Programme)
- In terms of capital expenditure, off-budget financing is used to fund railway projects through borrowings from the Indian Railway Finance Corporation (IRFC) and power projects through borrowings from the Power Finance Corporation (PFC).
Reality versus Projections
- It is extremely important to look at the total debt of the government with reference to the gross domestic product (GDP).
- The total liability worked out to 50.5% of the GDP against the projection of 47.10% as mentioned in the medium-term fiscal policy (MTFP) statement of 2016–17.
- Similarly, after incorporating the off-budget borrowings for revenue expenditure, the revenue deficit stands at 3.48% of the GDP against 2.59% reported by the government for 2017–18.
- After adding the off-budget borrowings for capital expenditure, the fiscal deficit stands at 5.85% of the GDP against 3.46% reported by the government for 2017–18.
Challenges in addressing the issue
- Currently, there is no policy that governs such off-budget financial arrangements, and the government is free to decide the mode and quantum of such financing.
- There has been an absence of transparent disclosures on such huge off-budget financing, which can pose substantial fiscal risk in case the entity that raises the funds fails to service the debt.
Way Forward
- Given that such off-budget financing has serious fiscal implications on the economy, the CAG report recommended that the central government should frame a policy on off-budget financing.
- The framework should specifically mention the objectives and quantum of off-budget financing, the sources of such funding, and the means for servicing of such debt.
- The details of such off-budget borrowings should be disclosed through disclosure statements in the budget as well as in the government accounts.
- It is recommended that the government include the off-budget financing items for calculation of the revenue deficit, effective revenue deficit, and fiscal deficit.