The Hindu Business Line : EAC report cautions against off-budget liabilities

New Delhi, Aug. 13 The Economic Advisory Council (EAC) to the Prime Minister has rapped the authorities under the knuckle that in their endeavour to adhere to the targets of fiscal rectitude, they have piled up off-budget liabilities, particularly in oil, fertilisers and food— the triple bonds that would pose “significant fiscal risks” to the economy.

In its latest economic outlook for 2008-09, released here by the outgoing Chairman of the EAC Dr C. Rangarajan, the Council contends that the off-budget liabilities on account of fertiliser, food and oil, coupled with unbudgeted liabilities stemming from the farm loan waiver and guaranteed rural employment schemes and the implementation of the Sixth central Pay Commission would amount to 5 per cent of the GDP in 2008-09. This would be over and above the budgeted central fiscal deficit of 2.5 per cent.

In a similar manner, the substantial cash losses of electricity utilities are not factored in the budgets at the State level. It has warned that the problem with off-budget liabilities is that not only do they cast an extra burden that has to be extinguished when the liabilities mature, but they also bear a significant servicing cost.

High interests

Lest there should be complacency on such off-budget liabilities, the Council points out that bonds issued under the market stabilisation scheme carry a much higher interest rate than the returns earned from the investment of foreign exchange reserves parked in US Treasury or other safe havens elsewhere. It estimates the expenditure on this score at Rs 13,958 crore.

Similarly, interest has to be disbursed on the bonds issued to oil and fertiliser companies and the Food Corporation of India, the outgo on which in the current fiscal would be Rs 8,000 crore. Together, Rs 21,958 crore would have to be shelled out which would make a commensurate dent in development expenditure, particularly when the Council laments that the “economy continues to be supply constrained, most acutely in the areas of physical and social infrastructure, which require focussed policy attention”.

Perpetual debt

If these were not enough, the Council cautions that “the sizeable increase in off-budget liabilities estimated above would carry an even larger interest payment burden in future”. This is a sure recipe for increasing inter-generational inequity by condemning posterity to perpetual debt burden for not conforming to moderating aggregate demand now or undertaking some austerity practices to curb extravagant consumption pattern.

The Council asks the authorities to complete “a large backlog of fuel price adjustments urgently for preserving order, transmitting the right signals to dampen the market demand for automotive fuels, which in turn has a large impact on our external payments”. It also admits that infrastructure, particularly electricity, remains an “enormous challenge” and maintains that “the opportunity cost of foregone power generation is expressed in the form of foregone incremental industrial output and an increase in their average cost of supply”.

It is small wonder that manufacturing sector growth is tepid in the first quarter testifying to the slowdown of the Indian economy from the 9 per cent last fiscal to a level of 7.7 per cent forecast now for fiscal 2008-09.

Food price factor

The Council cautions that “aside from the plethora of challenges already on the table, there is also some danger on the food price inflation front”.

It is also sceptical of the recent RBI’s assertion set out in its monetary policy review that a “realistic policy endeavour would be to bring down inflation from the current level of 11-12 per cent do a level closer to 7 per cent by March 31, 2009” by stating that the “road to this outcome is a challenging one”.

It said that coordinated policy action, coupled with some reinforcement of the recent cooling evident in world commodity prices and monetary actions by other central bankers could help bring the rate of inflation down by the end of March 2009 to 8-9 per cent.

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