No ‘creative’ accounting in Budget, please

Govind Bhattacharjee | Updated on January 23, 2020

With debt reaching alarming levels, the FM should look to curb populist expenditure and set up an independent Fiscal Council

In a few days’ time, the Finance Minister will present the Budget and she will possibly try to paint as rosy a picture of the economy as possible. No one expects her to produce miracles when the economy is nosediving, but the least one expects is an honest and transparent Budget that does not hide more than it reveals.

The reliability of Budget estimates has always been poor. The gross fiscal deficit (GFD) projected in the Budgets continues to be hugely understated due to the government’s off-Budget borrowings, which, despite their serious fiscal consequences, do not enter the GFD calculations. As pointed out by the CAG in Report No. 20 of 2018, the government had used this, along with some creative accounting, to understate the GFD by about 2 per cent of GDP in FY17, that is, more than ₹3 lakh crore, when it was shown to be 3.5 per cent of GDP.

Attempts at window-dressing the Budget is nothing new in India, and overstating revenue estimates and understating the expenditure estimates have long been a disturbing feature not only of Union Budgets but equally of State Budgets. This is done by a combination of many ingenious strategies.

First, by taking advantage of the cash basis of government accounting, payment of subsidy to FCI, a committed revenue expenditure for the current year, is delayed and carried over to the next year through special banking arrangements. This affects the cash flow of the FCI, forcing it to borrow and making the subsidy much more costlier. In the process, the deficit of the government is passed on to FCI.

State entities bear the brunt

Second, state-owned enterprises are made to finance Central schemes through their own borrowings guaranteed by the government, instead of the government directly financing these through its Budget. Thus the Accelerated Irrigation Benefits Programme was financed by NABARD, and capital projects in the rail and power sectors were financed by Indian Railway Finance Corporation and the Power Finance Corporation, respectively.

Third, some payments like railway freight for the next year are collected in advance from public sector units such as Coal India and NTPC as current receipts. Such manipulation of Budget figures is frowned upon by international credit rating agencies with consequent impact on the foreign investment flows into India.

Higher deficit means higher borrowings, which are made not only in the Consolidated Fund but also in the Public Account of India. The CAG had pointed out that the Public Account liability was understated by ₹7.6 lakh crore (4.9 per cent of GDP) in 2016-17. With an outstanding liability exceeding ₹85 lakh crore or 45 per cent of the GDP in 2018-19, debt is a serious problem facing the economy. Articles 292 and 293 of the Constitution mandate that the Central and State governments, respectively, enact laws imposing limits on their borrowings. But till now neither the Centre nor any State has enacted any such law.

The only way to protect the nation’s fisc from political expediency is to set rules backed by an independent Fiscal Council; more than 90 countries have done this. The Fiscal Responsibility and Budget Management Act (FRBMA) of 2003, which mandated the GFD be reduced to 3 per cent by 2008-09 along with targets for revenue deficit and outstanding liabilities, qualified as a fiscal rule till 2009.

But governments showed no interest in curtailing their populist expenditure; hence the FRBMA was amended repeatedly, deferring the targets. An artificial concept of ‘effective revenue deficit’ was introduced in the 2011-12 Budget, deducting grants for creating capital assets from the revenue deficit. This was found to be bogus; the CAG discovered that the expenditure on procurement for maintenance, which had nothing to do with creation of capital assets, was treated as such. The FRBMA 2003 ceased to be a l rule after 2009.

A FRBM Review Committee constituted in 2016 had suggested a set of benchmarks, including reduction of the GFD to 3 per cent and creation of a Fiscal Council. Without acting on its suggestion of Fiscal Council, the government amended the FRBM framework through the Finance Act of 2018, making 3 per cent fiscal deficit as the key operational target to be achieved by FY-21, abolished the effective revenue deficit, and including primary deficit as a new fiscal indicator.

A ceiling of 60 per cent of GDP — 40 per cent for Centre’s and 20 per cent for the States’ debt — by FY-25 was also adopted, with a 5 per cent combined fiscal deficit for the Centre and the States in the medium-term. This is also likely to be junked. In this context, one would want the Finance Minister to present a Budget that depicts all off-Budget borrowings; bring a Constitutional Amendment imposing limits on the borrowing; and announce the creation of an independent Fiscal Council where the government representatives would not constitute a majority.

The writer is former DG ,CAG’s office

Published on January 23, 2020

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