Number games

Whether the NDA government has reined in its fiscal deficit to the targeted 3.3 per cent of GDP seems to be the most-watched factor for the financial markets in the upcoming Union Budget. In recent years, global rating agencies have taken to revising their India outlook based on the government’s ability to stick to its stated deficit target, bond market yields have reacted sharply to tweaks in government spending, and even the stock markets have been less than thrilled at news of the government stimulating the economy, if it means overshooting the deficit target. This widespread obsession with the fiscal deficit has rendered Indian governments extra-conscious about presenting the ‘right’ fiscal deficit number in their Budgets, even if means giving other long-term considerations the short shrift.

The government’s cash-based accounting system (as opposed to commercial accrual-based system) makes it quite easy for any ruling regime to adjust the reported fiscal deficit, through a variety of short-term fudges. The UPA regime famously used oil bonds to kick the can down the road, on fuel subsidies. The NDA has been shoring up its non-tax revenues by raiding regulatory reserves, and brokering buybacks, inter-company deals between PSUs. A recent CAG report examining compliance with FRBM rules has critiqued the government for increasingly using off-budget routes to meet its expenditure, impacting its deficit and debt calculations. It notes that entities such as the FCI or the Fertiliser Ministry taking repeated recourse to external borrowings due to budget shortfalls, has added a sizeable interest component to the already mammoth subsidy bill. Such practices to dress up deficits clearly hurt inter-generational equity and cost taxpayers dear in the long run. It also flagged that ambitious capex targets for rural infrastructure and the railways are increasingly being met by off-budget borrowings by quasi-government arms such as NABARD, PFC and IRFC. While there is nothing prima facie wrong in their tapping market borrowings, in the absence of consolidated disclosures on the aggregate size of such borrowings and their repayment schedule in the Budget, they can build up over time to pose a risk to the fisc.

While transitioning the Central and State governments from a cash to a commercial accounting system may be a tall ask, it would greatly add to the credibility of the Budget exercise if this government plugs the disclosure gaps on deferred liabilities and off-budget borrowings as suggested by the CAG. Presenting a clean fiscal deficit number has become even more significant for the NDA, after it has modified the FRBM rules to embrace the fiscal deficit as its key operational target. It has in any case incorporated several escape clauses (collapse of agriculture, structural reforms, decline in real output) that give it ample leeway for minor deviations. It would also be good if the commentariat evaluated the Budget for its ability to offer a realistic picture of government finances rather than being fixated on the fiscal deficit hitting bull’s eye.

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