JANUARY 22, 2019

By TIOL Edit Team

COMPTROLLER and Auditor General (CAG) has set a new agenda for fiscal reforms. It has advised the Union Government to unveil a "policy framework for off-budget financing, which, amongst others, should include disclosure to Parliament".

In its report on fiscal discipline presented in the winter session of Parliament, CAG has suggested that the proposed policy provide the rationale and objective of off-budget financing, quantum ofoff-budget financing and budgetary support under the same project or scheme, instruments and sources of financing, means andstrategy for servicing of off-budget debt.

The Policy should also give details of the off-budget financing undertaken during a financial yearthrough all entities substantially owned by Government.

The 14th Finance Commission (FFC) too made a similar recommendation in its report released during February 2015. It urged both the Centre and the States to adopt a template for collating, analyzing and reporting the total extended public debt in their respective budgets as a supplement to the Budget document.

FFC stated that this should be done by "keeping in mind the importance of risks arising from guarantees, off-budget borrowings and accumulated losses of financially weak public sector enterprises".

The Centre has not acted on this recommendation. This perhaps holds true of the States too. It is unfortunate that Government of the day pays lip-service to non-binding recommendations by stating that such suggestions would be considered in due course.

In its report on'Compliance of the Fiscal Responsibility and Budget Management Act (FRBM), 2003 for 2016-17', CAG has done a commendable job in studying the unhealthy practice of off-budget transactions, both on the borrowing and expenditure sides.

The Report, presented on 8 th January 2019, notes that the Government has increasingly resorted to off-budget financing for revenue aswell as capital spending.

As for revenue spending, off-budget financing (OBF)is used for deferring fertilizer arrears through special bankingarrangement (SBA) for facilitating lending to fertilizer suppliers. OBF was also used to coverfood subsidy arrears of Food Corporation of India (FCI) through borrowings.

Such short-term credit helps the Government carryover the unpaid subsidy arrears to the next year's budget. This has become a regular feature of the fiscal laxity.

OBF is also used to implement Accelerated Irrigation Benefit Programme (AIBP) through borrowings by National Bank for Agriculture and Rural Development(NABARD)under the Long Term Irrigation Fund (LTIF).

Similarly, for capital expenditure, OFB is utilized to fund railway projects. In this case, debt is raised by Indian Railway Finance Corporation (IRFC) through market borrowings. A similar approach is followed in the power sector with aid of Power Finance Corporation (PFC).

Both regularly mobilize resources in the domestic and international capital markets. Other public enterprises such as Rural Electrification Corporation (REC) follow same practice. Their overseas borrowings are not only for re-lending but also stabilizing Rupee-dollar exchange rate as was done this year.

It is here pertinent to note that off-budgeting has been going on for last more than two decades. The only difference is that it is becoming more pervasive and diverse with the passage of time. This is evident from the fact that the term 'off-budget' figures 50 times in CAG report.

This underscores the urgency for stemming the fiscal indiscipline, a task that should get top priority from the new Government after the LokSabha polls due in April-May 2019.

According to CAG report, Government has now recognized off-budget borrowings as a prominent method of financing capital expenditure. Financing for large infrastructure projects involving huge investments should be aligned in such a manner that the future rate of return from the investment is able to generate enough revenue to cover debt-servicing costs.

The report notes that in the absence of any policy guidelines in respect of deployment of borrowed funds, there is risk of deployment of these funds in areas which do not generate enough returns to cover future debt servicing needs.

We are reluctant to accept that certain off-budget borrowings are essential for funding long-gestation projects. In that case, such loans should be counted along with budgetary borrowings to determine the overall public debt as percentage of Gross Domestic Product (GDP).

Off-budget instruments include erstwhile oil and fertilizer bonds, the present special banking arrangements for fertilizer subsidies and the ‘Government of India fully serviced bonds' for infrastructure funding and special GOI security for recapitalization of public sector banks.

All these instruments enter into debt liability only when the payment of interest and principal becomes due. Off-budget borrowings thus enable the Government to shift its debt burden to the future years. This, in turn, help the Government present a less alarming picture about its debt liability, which is considered worrisome if it breaches 60% of the GDP.

Off-budget debt is not reckoned while computing government guarantees for raising loans. FRBM rules specify a ceiling on such guarantees that can be issued to nominated borrowers in a year.

CAG has rightly stated that prudential borrowing norms suggest that borrowed money should be deployed in such a manner that return from deployment of borrowed funds is more than borrowing cost of debt. Such approach is crucial for debt sustainability.

CAG thus wants the Government to create a policy framework for deployment of borrowed funds keeping in mind cost of borrowing and potential of increase in income.

Put simply, the Government should embrace fiscal transparency and accountability in true spirit. It should accordingly constitute an independent fiscal council, which can submit quarterly reports, as compared to CAG's year-end reports.

Quarterly reports & advice would help Government, as in other countries, to avoid fiscal laxity. All stakeholders excluding the Government agree to the idea of fiscal council.

Successive Finance Commissions, FRBM Review Committee and International Monetary Fund have all brought to Government notice the virtues of global trend of constituting fiscal council.

We hope the new Government would accept this virtue, thereby opening a new chapter in fiscal discipline.