The Finance Minister, in his Budget day speech, announced substantial spending in areas such as infrastructure, agriculture, rural and urban development.

But a closer look at the numbers show that the Centre has set aside only ₹2.47 lakh crore for capital expenditure in 2016-17, an increase of just 4 per cent, year-on-year; far lower than the 21 per cent increase in capital spending recorded in 2015-16.

So, how will the large investments promised in the Budget be funded? Given that the government is in a tight spot on the fiscal front, a chunk of the spending in many cases will be funded by IEBR (Internal and Extra Budgetary Resources). The IEBR constitutes funds raised by central public sector enterprises by way of profits, loans and equity.

According to Sonal Varma, Chief India Economist, Nomura, given that the government’s finances have been quite constrained, higher dependence on off-balance sheet financing of public capex in 2016-17 was expected.

Of the aggregate outlay for all ministries taken together, 56 per cent is expected to be funded by IEBR in 2016-17, with the rest being supported by central budgetary resources. In the past years too, the IEBR component has been substantial.

The Central Plan Outlay (part of the Budget documents), shows that the expenditure budgeted for every Ministry, each year, is financed by a mix of gross budgetary support (GBS) and IEBR. The GBS is what the Centre allocates to each Ministry or activity from its own resources, comprising tax and non-tax revenue.

This is the expenditure that is taken into account while calculating the fiscal deficit. The IEBR, which finances all public sector capex (and not just central government capex) is kept out of this calculation.

Infra funding

In infrastructure-related spending, about 40 per cent of the total outlay of ₹2.30 lakh crore budgeted for railways, ports, shipping, civil aviation, roads, inland water and other transport services in 2016-17, has been provided for by central government budgetary resources. The rest will come from IEBR which includes the internal resources of central PSUs, their borrowings and collaborative funding by state governments and the private sector.

Borrowings can include money raised through tax-free bonds by entities such as NHAI, PFC, REC and Nabard or even multilateral funding. Compared to last year, the central government budgetary support for these sectors in 2016-17, has gone up 12 per cent while the IEBR is up 43 per cent.

For agriculture and allied activities, IEBR constitutes 35 per cent of the total outlay of about ₹19,400 crore for 2016-17. Though much smaller, for urban development too, 15 per cent of the budgeted allocation is accounted for by IEBR.

But, it’s much larger for housing. Here, IEBR constitutes 96 per cent of the total outlay of about ₹17,110 crore for 2016-17. Tax-free bond issuance by HUDCO (Housing and Urban Development Corporation), for instance would form a part of it. The central budgetary support is accordingly a miniscule 4 per cent.

As Varma explains, for this year, the reliance on IEBR is basically an outcome of the circumstances – the government wants to consolidate fiscally but it has to implement pay hikes too. At the same time, as private investment is weak, the government needs to support growth too, so it is running short of money.

The challenges

But, the challenge here is that the government is depending on the ability of others to be able to generate resources. For instance, if a state government is facing an upcoming election and is not able to spend or a public sector company is not able to perform well enough, then the situation will not be within the Centre’s control.