Comprehensive Note on Fiscal Deficit and Debt in India

Fiscal Deficits and Debt

Albatross Around the Neck of the Government of India?

Can Government live without Deficits and Debt?

In today’s world, Governments of rich countries are the biggest borrowers, though they don’t need to. Countries like Japan, the US, Italy, France, Portugal, have all accumulated very high level of debts. For poor and developing countries, there is hardly a choice. Their gross national income and per capita income are small; to grow, they have to borrow. Borrowing for current consumption does not add productive capacity to grow, but borrowing for investment to raise production, incomes and standard of living is perfectly sensible.

The difference between Government’s total revenues and its total expenditures is the deficit, the ‘fiscal deficit’ and to finance it, the Governments’ borrow. If the Government’s current expenditures also exceed its total revenues, it runs ‘revenue deficit’. As the Government of India has been borrowing for current expenditures and also its’ interest payments are large unmatched by the returns on the debt and liabilities accumulated, the Government is running large revenue deficits. Central Government’s fiscal deficit during 2017-18, the year for which final data are available, was Rs. 624276 crore, which was only a fractionally higher than the interest payments of Rs. 575795 crore.  Situation is only worsening. Effectively, the Central Government borrows to pay interest these days.

There are lots of misgivings and lack of information about fiscal deficit, debt and liabilities of the Central Government. Public Debt and other Debts taken through the Consolidated Fund of India, borrowings in the Public Account, Off-budget borrowings, Fully Serviced Bonds and Other Liabilities etc. can really complicate the understanding for even those involved in managing government accounts and finances. Then, sometimes, economists and commentators expand the concept of Government Debt and Liabilities to include Public Sector undertakings and authorities’ borrowings. The fact that some of these entities are actually non-commercial as they do not have revenues to service their debts, it does raise legitimate question about whether all such or some of these borrowings should be included in the debt and liability of the Government of India.

This Note attempt to clarify the status of debt and liabilities of the Government of India. It also attempts to address some very valid questions- whether the debt and liabilities of the Government of India are too high? Or whether the Government can run loose fiscal policy in the current situation of acute demand slowdown- both on consumption and investment side? Or, whether borrowing for current expenditure is justified or what is the composition of capital expenditure which is used primarily to justify taking of debt and liabilities by the Governments?

 What is the Size of Central Government Debt and Liabilities?

A.   Sources of Debt Data

Best source to get a good sense of the Central Government’s debt and liabilities is the Status Paper on Government Debt published annually by the Department of Economic Affairs, Ministry of Finance. Unfortunately, this gets published in only the last quarter of a financial year for the debt and liabilities of the year before. The Status Paper on Government Debt for 2017-2018 was published by the Ministry of Finance in January 2018. This publication for 2018-19 is not yet published. DEA also brings out a quarterly publication- Public Debt Management- which primarily deals with the issuance, trends and issues connected with the ‘market borrowing’ of the Government of India. The publication for July- September 2019-20 has been published in December 2019.

CAG does comment on some aspects of public debt and liabilities classification and management as part of its performance review, but the same does not validate debt and liabilities data comprehensively.

I have, therefore, used the concepts, definitions and data used primarily in the Status Paper on Government Debt for 2017-2018 for building this Note. Latest numbers and trends, whatever available, have been taken from the budget papers, accounts published by the Controller General of Accounts (CGA) and the quarterly publication of Public Debt Management by DEA.

B.   Difference in Debt and Liabilities as per Budget and Status Paper

There is some important difference in the concept and definition of debt and liabilities used in the Budget Papers and the Status Paper on Government Debt. Let us first clear this.

Budget Papers of the Government of India have 12-14 documents. There is no specific document dealing with the debt and liabilities of the Government of India. The Receipts Budget document deals with the debt and liabilities as well. From last year, the Receipt Budget has a separate Part- the Part B, which has an Asset and Liability Statement, which also carries the debt and liabilities related statements.

There is a Statement of Liabilities of the Central Government published on page 48 of the Receipt Budget 2019-20, which states the total actual Debt and Liabilities of the Government at Rs. 82.35 lakh crore at the end of 2017-18. This Statement carries a Note to state that liabilities of “Govt. fully serviced bonds” is in addition.

The Status Paper on Government Debt, December 2018, however, reports that actual Debt and Liabilities of the Central Government was at Rs. 77.99 lakh crore at the end of 2017-18. 

This is at the Total Liabilities row on 4 of the Table 1.2: Debt Position of the Central Government. There is thus a difference of Rs. 4.36 lakh crore between the two numbers released by the Department of Economic Affairs.

C.   What explains the difference between the two numbers?

1.    Treatment of loans to States and GOI agencies by NSSF

The Status Paper provides a reconciliation between the two numbers and explain this discrepancy as these two Statements use different definitions/ concept of Debt and Liabilities of the Central Government. The Difference of 4.36 lakh crore has been explained by the following:

a.    The Receipt Budget Statement shows Government of India owing a composite liability of Rs. 8.06 lakh crore towards National Small Savings Fund (NSSF), as part of the Other Liabilities of the Government of India (other than Public Debt). The Status Paper on Government Debt divides this composite liability in three parts and treats these differently. The three parts are

                                          i.    NSSF’s investment in States’ Securities Rs. 5.07 lakh crore.

                                        ii.    NSSF loans to Public Agencies Rs. 1.62 lakh crore and

                                       iii.    NSSF’s Cash Balance (in Public Account) Rs. 1.37 lakh crore.

b.    These three components together equal Rs. 8.06 lakh crore.

c.    A good part of NSSF’s corpus is actually invested in Central Government securities, which becomes a part of the Internal Debt of the Government of India. The remaining investment, which was Rs. 8.06 lakh crore in 2017-18, is invested three ways. Status Paper on Government Debt excludes first two items- Investment of NSSF in the Securities issued by the State Governments and NSSF’s loan to Public agencies from the Debt and Liabilities of the Central Government. These two items make the Central Government Debt and Liabilities shorter by Rs. 6.69 lakh crore.

d.    Exclusion of NSSF’s investment in State Governments’ securities from the Debt and Liabilities of the Government of India is perfectly justified as these liabilities are actually that of the State Governments and not of the Central Government. Simply because the NSSF is in Public Account of the Government of India, treating this as Central Government’s liabilities would be overstating the liabilities of the Government of India. Further, these liabilities are also accounted for in the accounts of the State Governments as their liabilities. Inclusion of this liability as Centre’s Liabilities in the Budget Document actually makes it double counting.

e.    Loans to Public Agencies are the loans made by the NSSF to the Government of India entities like FCI, NHAI etc. Investment by NSSF in commercial entities (IRFC e.g. or the authorities of the Government of India, which are structured as self-financing organisation like NHAI, may not be assumed as Government of India’s liabilities. However, loans to Agencies like FCI, basically to provide loan cash against revenue liabilities of the Central Government by reducing Food Subsidy expenditure must certainly be treated as the liability of the Central Government as FCI has no revenue and even the interest on loans from NSSF has to be provided for by the Government of India.

f.     An analysis of these loans from the Statement on NSSF available in Receipt Budget 2019-20 indicates that FCI had received from NSSF Rs. 70000 crore in 2016-17 and Rs. 65000 crore in 2017-18 to cover deferred payment of food subsidies. Out of this, Rs. 14000 crore was repaid in 2017-18. Rs. 1.21 lakh crore was, thus, net outstanding as on 31^st March, 2018. This is Government of India’s liability. Likewise, the Building Materials and Technology Corporation (a receptacle of the Ministry of Housing and Urban Affairs had received Rs. 8000 crore to cover PM Awas Yojana subsidies in 2017-18. Thus, liabilities of Rs. 1.29 lakh crore represented clear obligations of the Central Government and should be treated as the liability of Government of India.

g.    Remaining loans from NSSF (Rs. 20000 crore to NHAI, Rs. 10000 crore to IRFC and Rs. 3000 crore to Air India for aircraft purchase, in all Rs. 33000 crore may not represent the Debt and Liability of the Government of India and can remain excluded from the GoI Debt and Liabilities as has been made in the Status Paper on Government Debt.

h.    Therefore, the Debt and Liabilities of Rs. 77.99 lakh crore, as enumerated in the Status Paper on Government Debt needs to be increased by Rs. 1.29 lakh crore or to Rs. 79.28 lakh crore on account of incorrect treatment in the Status Paper. It would also be advisable to have same treatment of NSSF investment in State Government Securities and Loans to GOI Agencies in the Budget Papers to make the two sets of documents identical.

2.    Difference of treatment in case of External Loans

The second difference is in terms of the treatment of external debt in the Budget and the Status Paper. The budget documents state External Debt liabilities of the Government of India (Rs. 2.50 lakh crore) in historical values (loans taken at the exchange rates prevailing on the date of receipt of the loan proceeds minus the loans repaid taken at exchange rates prevailing at the time of repayment). The Status Paper, quite differently, states the same at the exchange rates applicable at the time of drawing of the Statement (Rs. 4.83 lakh crore). The difference between the two is 2.33 lakh crore.

Value of External Debt used in the Status Paper on Government Debt is correct and historical values in the Budget Papers misleading. While the Government Accounts, so long as these are on cash basis, cannot have the fair value of External Debt at current exchange rates, there is no bar in reflecting the difference as an adjustment entry in the Statement of Liabilities in the Receipt Budget to reflect identical value of Debt and Liabilities in both the Statements.

Size of Government Debt and Liabilities taking into account these two items

The Budget Papers understate the Debt and Liabilities of the Government of India on account of External Debt. On the other hand, the Budget Papers overstate the Debt and Liabilities by including NSSF’s investment in State Government securities and Loans given to Commercial and Self-sustaining entities of the GOI. The net impact of these two differences is Rs. 4.36 lakh crore (Rs. 6.69 lakh crore minus 2.33 lakh crore), which equals the total difference between the Budget Papers and the Status Paper. There is wrong treatment of Loans given to non-commercial or grant institutions of the Government of India as brought out above. Therefore, correct Debt and Liabilities of the Government of India, as on 31^st March, 2018 was Rs. 79.28 lakh crore instead of Rs. 77.99 lakh crore.

Liabilities which are not treated as part of Fiscal Deficit

Fiscal Deficit represents Net Borrowings by the Government in a year. Difference between the Debt and Liabilities at the beginning and at the end of a Financial Year also represents Net Borrowings during the year. Fiscal Deficit should therefore equal change in the Debt and Liabilities during the Financial Year. Unfortunately, this does not happen this way many times. There are some liabilities which are taken directly to the Debt and Liabilities, without being treated as part of the Fiscal Deficit. People describe this differently- Below the Line, Off Budget etc. The methods used are quite simple. Either, the payments creating such liabilities are excluded from the Consolidated Fund of India (CFI) and routed through the Public Account Or, some corresponding receipts are used as minus entry while recording such payments in the CFI. Let us remember that the difference of Expenditures and Revenue Receipts in the CFI only is described formally as the Fiscal Deficit. In both these cases, the liabilities assumed by the Government are included in the Debt and Liabilities of the Government of India, though not included in the Fiscal Deficit.

During the FY 2017-18, the Government of India issued Special Securities to Public Sector Banks (PSBs) in which the PSBs invested Rs. 80000 crore. The Government used this money to invest in the shares of the same PSBs. These transactions were routed through the Consolidated Fund of India (CFI) by deducting the investment received from PSBs from the Investment made in the shares of the PSBs, effectively making it a zero expenditure, resulting in no fiscal deficit implication. Popularly, these transactions are described as Bank Recapitalisation Bonds. As these transactions were carried out through the CFI, the liability created in the form of the Special Securities issued to the PSBs is shown as part of the Public Debt and Internal Debt of the GoI in the Statement 1 (i) referred above as part of the Receipts Budget [page 48 item A.1.(iia)]. The Government, in the years between 2004-2010 had issued Special Securities to Oil Marketing Companies (OMCs) and Fertiliser Companies in lieu of its subsidy obligations. These transactions were carried out through the Public Account. Subsidy paid to Food Corporation of India (FCI) by giving loans from the NSSF are transactions similar to the payment of subsidy to OMCs by issuing Oil Bonds. The liabilities undertaken by the Government of India on these bond accounts are reflected as Other Liabilities of the Government in the Statement of Liabilities referred above. At the end of year 2017-18, a liability of Rs. 162827 crore was outstanding towards the Oil Bonds and Fertiliser Bonds.

The investment made by the Government of India in the equity of PSBs, funded from the recapitalisation bonds issued by the Government represented investment of the Government of India and was therefore Government of India expenditure in every sense of the term. Amount invested by PSBs in Government of India securities was no different in substance, in term of the liability of the GoI, than the investment made by the same PSBs in the market securities issued by the Government. The GoI pays interest on these bonds at market rate of interest. Investment made by the Government in the equity of public sector entities, whether Banks or non-financial PSUs have always been treated as expenditure/investment of the Government and accordingly reflected in the Capital Expenditure part of the CFI. Rs. 80000 crore of the investment made by the Government in the equity of the PSBs during the year 2017-18 should therefore be treated as part of the Fiscal Deficit.

What are Off-Budget Debt and Liabilities of GoI?

Some liabilities are assumed/created by the Government of India which don’t form part of both Fiscal Deficit and the Debt and Liabilities of the Government of India. These are really the Off-Budget Liabilities.

There are three such liabilities. One such liability has been created using NSSF balances to provide cash against the food subsidy liability of the Government of India. This has been dealt with above. The other such liability is what is described as Fully Serviced Bonds (FSBs). FSBs innovation was started in 2016-17. The third one relates to liability of servicing annuities linked to infrastructure projects, specifically road sector projects awarded under the Annuity and the Hybrid Annuity financing model.

Short of fiscal space, the Government allowed its Agencies to borrow from the market, though financial institutions like NABARD or directly, to incur expenditure on social welfare programme. For example, the a good part of the subvention given for construction of houses under PM Awas Yojana or toilets under Swacchh Bharat Abhiyan was paid through Societies or other Receptacles created for raising debt and paying the subsidies. As such expenditure had no revenue stream, the Government assumed liability of fully serving these borrowings i.e. both the interest as well as principal. The nomenclature Fully Serviced Bonds rightly describes its nature. The Government budgets for interest payment on these Bonds in the respective budget of the concerned Departments. Repayment of principal would be provided for similarly in the year of redemption.

Reflecting their nature, there is no inclusion of these expenditures in the fiscal deficit or the debt and liabilities of the Government of India during 2017-18, the year for which we are trying to construct full picture of Government’s debt and liabilities. For the first time, the Budget 2019-20 makes a mention of it in the form of Note to the Statement of Liabilities of the Central Government. It states “In addition to above, Govt. liabilities on account of Extra Budgetary Resources (Govt. Fully Serviced Bonds), at the end of FY 2018-19 were Rs. 88,454 crore, which was about 0.47% of GDP. In FY 2019-20, additional liabilities on this account are estimated to Rs. 57004 crore, which is about 0.27% of GDP.”

The Government also included a Statement of Extra Budgetary Resources (Govt. fully serviced bonds) (Statement 27) in the Expenditure Profile – published as part of the Budget Papers. According to this Statement, the Government of India, had issued FSBs of Rs. 9167 crore in 2016-17 and Rs. 15095 crore in the year 2017-18. Thus, the off-budget liability towards FSBs was Rs. 24262 crore at the end of FY 2017-18. This is to be included in the Debt and Liabilities of the Government of India for the year 2017-18.

The Government publishes a statement of the Liability of Annuity Projects (Statement 4, page 61 of the Receipts Budget 2019-20. As per this Statement, there are 38 Road projects for which outstanding annuity obligations at the end of FY 2017-18 was Rs. 45,689 crore. There are seven other annuity-based projects (two under the Ministry of Home Affairs and five under the Ministry of Water Resources). As annuity payments have not started under these seven projects, aggregate annuity commitments under these projects of Rs. 5050 crore can be taken as outstanding Debt and Liabilities obligations of the GoI. Thus, total liability obligations towards annuity payments as at the end of FY 2017-18 is Rs. 50,739 crore, which is to be included in the total Debt and Liabilities of the Government of India at end 2017-18.

An on-budget liability which should be excluded!

The Government of India is the official borrower of externally aided loans from the multilateral and bilateral institutions. Government of India also borrows for the State Government projects. Practice prior to 2005-06 was to transform the original loan conditions from multilateral/bilateral institutions and give the loans and grants received under a standard 70:30 package- 70% as loan and 30% as grants. Until such a time, the Government of India was actually acting as a financial intermediary, borrowing from multilaterals/ bilateral agencies and lending to the States. Reflecting this nature, all external loan liabilities of the Government of India were treated as the liabilities of the Government of India. From 2005-06, these EAP loans have been passed on to the States on ‘back to back basis’ thereby making it the obligation of States to pay for the current value of these loans while making repayments. GoI is no longer the principal borrower, but only a nominal borrower. Moreover, the treatment of these loans as GoI liabilities also lead to double counting of loans as these are also treated as the Debt and Liabilities of the State Governments.

Taking note of this special and real nature of the externally aided loans, the GoI, from financial year 2018-19, is showing the transfer of loan proceeds to the States by way of a minus entry, thereby ensuring that these loans are not reflected as Government of India’s Debt. This leaves only the treatment of past such loans to be addressed while trying to depict true state of debt and liabilities of the GoI. If we can segregate pre-2018-19 debt representing the State Government liabilities, that chunk of debt can be reduced from the overall debt and liabilities of GOI.

As per the Finance and Accounts 2017-18 of the Union Government, External Debt at historical prices was Rs. 250009 crore and at current prices Rs. 445282 crore or 178% of the historical values. A major part of this Debt has been on-lent to the State Governments by GOI, which is included by the States as their Debt and Liabilities under the title “Loans from the Centre”. Total loans outstanding towards State Governments on 31st March 2018 was Rs. 157922 crore (Finance Accounts 2017-18), which are at historical costs. GOI had stopped lending to States from its own budget in 2005-06 by and large. Specific break-up of loans outstanding towards State Governments into EAP loans and non-EAP loans and pre and post 2005-06 EAP loans are not available from the GoI budget and accounts documents.  Taking into account the broad trends, it would be fair to assume that the current value of EAP loans payable by the States at current exchanges rates is in the vicinity of Rs. 175000 crore. This amount should be excluded from GoI Debt and Liabilities.

Presentation of different components of Debt and Liabilities

The Debt and Liabilities of the GoI are depicted differently also in the Budget Documents and the Status Paper. Status Paper brings all types of the marketable securities, including special securities converted into marketable securities later and Treasury Bills outstanding, other than 14 days non-market treasury bills, under one consolidated head. Budget Documents show these under different sub-heads. Likewise, all non-marketable securities issued from the Consolidated Fund of India, are brought together under broad nomenclature of Non-marketable Securities. But, securities issued from the Public Account are not bunched together as part of non-marketable securities. There are some liabilities specifically mentioned as part of the Public Account- State Provident Funds etc, but not the securities issued to PSUs, Employee Provident Fund etc., which is lumped together as Other Liabilities.

For clearer understanding and to reflect truer character of the liabilities, I am making following classification:

a.    Marketable Securities, which are traded/tradable in the financial markets.

b.    Non-marketable Securities, issued for a specific purpose, from either the Consolidated Fund of India or from the Public Account or still not accounted in the Status Paper (FSBs and NSSF loans to cover revenue expenditures).

c.    External Debt

d.    Specific long-term Public Account liabilities (Provident Fund etc.)

e.    Other Public Account Liabilities, like Reserve Funds, Deposits etc. which essentially has cash financing role.

f.     Government had also assumed certain liabilities in the form of annuity payments for the construction work, which is stated in a separate statement in the Budget Documents. This also needs to be included in the Debt and Liabilities of the Government.

What were actual Debt and Liabilities of GOI at end 2017-18?

Taking the Debt and Liabilities for the FY 2017-18, as stated in the Status Paper and incorporating the changes explained above, depicting the liabilities in the order stated above, true debt and liabilities of the Government of India as on March 31, 2018 are

a.    Marketable Securities: As in the Status Paper i.e. Rs. 6401275 crore.

b.    Non-marketable Securities: As per the Status Paper, this is shown at Rs.891430 crore.  Securities issued to Oil companies, fertiliser companies etc. are non-marketable securities. These are in real sense the public debt of India, though presently shown as other liabilities. Accordingly, Rs. 162827 crore are being added to Non-Marketable Securities. In addition, Fully Service Bonds (FSBs) of Rs. 24262 crore are to be added to the non-marketable securities. Finally, NSSF loans to cover Revenue expenditure Rs. 129000 crore, though strictly not securities are also being added to reflect true nature of the Government’s obligations. Thus, the stock of non-marketable securities at the end of FY 2017-18 was Rs. 1207519 crore.

c.    External Debt, as per the Status Report, was Rs. 483005 crore. However, we should reduce the externally aided loans of Rs. 175000 crore outstanding with the State Governments. Accordingly, I take the GoI’s External Liabilities equal to Rs. 308005 crore at end FY 2017-18.

d.    GPF and Superannuation deposits of Government employees represent long term public liabilities. Likewise, there are some other liabilities of this nature included in both the Budget Papers and the Status Paper. Status Report depicts GPF etc. liabilities under the Head “State Provident Funds”, which was Rs. 200737 crore. Another such head in the Status Report is “Other Accounts”, which Rs. 324633 lakh crore as outstanding liability of the Government of India as on 31.3.2018. I have taken out liabilities of Oil, Fertiliser Bonds etc. of Rs. 162827 crore from this “Other Liabilities” head and placed these as ‘Non-marketable securities”. With these accounting adjustments, the Specific Long-term Public Account Liabilities comprising State Provident Funds and Other Liabilities minus oil and fertiliser bonds etc. amounts to Rs. 362542 crore (Rs. 200737 crore + Rs. 324633 crore – Rs. 162827 crore) as on 31-3-2018.

e.    Government of India uses uninvested balance in the National Small Savings Account and also in the Public Account for meeting its fiscal deficit requirement. Such cash drawdown or cash balances used amount to liabilities of the Government of India. These cash support/ usage is reflected in two heads in the Status Paper. One is the balance in the National Small Savings Fund of Rs. 136440 crore under part B- Public Account- Other Liabilities and the other is an amount of Rs. 252758 crore under the same Part as Reserve Funds etc. Thus, Government of India liabilities towards use of Cash support from Public Account was Rs. 389198 crore at end March 2018.

f.     Finally, we add Government of India’s liabilities towards Annuity Payments. This amount was Rs. 50739 crore, as brought out in previous paragraphs.

The Actual Government Debt and Liabilities, after taking into account, all the liabilities incurred by the Government of India comes to Rs. 78.28 lakh crore as on 31st March, 2018, which is somewhat higher than the Debt and Liabilities shown in the Status Paper (Rs.77.99 lakh crore).

The total Debt and Liabilities of the Government of India, in my assessment, at the end of FY 2013-14 was thus Rs. 7827848 crore. This is higher by Rs. 29000 crore. India’s nominal GDP during 2017-18 was Rs. 17095005 crore (as per advance estimates for 2019-20 released by CSO on 7^th January 2020). Thus, India’s Debt to GDP ratio at the end of 2017-18 was 45.79%.

The Debt and Liabilities number reported in the Budget Papers (Receipt Budget Part 2 of 2019-20) for 2017-18 was Rs. 8234877 crore. This made up 48.17% of the GDP. However, this does not represent correct description of Government of India’s Debt and Liabilities, primarily because it treats investment of NSSF in State Governments’ Securities as Government of India’s Liabilities. We should therefore take the size of debt (Rs.78.28 lakh crore) and debt to GDP ratio of 45.79% as truer extent of Government’s debt and liabilities.

STATE OF FISCAL DEFICITS

What was the Fiscal Deficit of Government of India in the FY 2017-18?

Fiscal Deficit of the Government of India, reported as actuals, in the Government of India Budget Documents was Rs. 591062 crore in the Financial Year 2017-18. This is 3.46 or 3.5% of the nominal GDP of Rs. 170.95 lakh crore.

We have to add the following to this fiscal deficit number:

a.    Rs. 80000 crore of investment made in the equity of public sector banks (PSBs), excluded from the Fiscal Deficit by, deducting from this investment receipt of Rs. 80000 crore from the very PSBs by way of their investment in the special securities issued by the Government of India. The investment in equity of PSBs represented capital expenditure of the Government of India and therefore needs to be added to the fiscal deficit of the year.

b.    Rs. 65000 crore of food subsidies were not paid. Instead, FCI was given cash of Rs. 65000 crore as loan from National Small Savings Fund (NSSF). This Rs. 65000 crore represented the revenue expenditure of the Government of India and therefore should be added in the fiscal deficit of the year.

c.    Government of India underwrote interest and principal’s liabilities for Fully Serviced Bonds (FSBs) for covering revenue and capital expenditure liabilities of the year to various organisations. Rs. 3105 crore of FSBs were issued to pay for the cost of irrigation projects under the Ministry of Water Resources, River Development and Ganga Rejuvenation. Rs. 4000 crore were allowed to be raised by the Agencies under the Ministry of Power for paying for the Government of India’s grant portion under Deen Dayal Gram Jyoti and Saubhagya schemes. Rs. 7330 crore of subvention support under the Pradhan Mantri Awas Yojana implemented by the Department of Rural Development were also paid through the FSBs. FSBs of an amount of Rs. 660 crore was allowed to be raised for covering similar liabilities of Inland Waterways Authority of India (IWAI) under the Ministry of Shipping. In all, FSBs of a total amount of Rs. 15095 crore were issued to cover the real revenue and capital expenditure obligations of the Government of India. This amount should be added to the fiscal deficit.

d.    The amount of annuity payments liabilities increased during the year should also be added to the fiscal deficit. However, this number is precisely not available in budget papers. In any case, this looks like a smaller amount of about Rs. 5000 crore. Hence, this is being ignored.

These three expenditures (Rs. 80000 crore for equity investment in PSBs, Rs. 65000 crore towards food subsidy and Rs. 15095 crore of FSBs to cover various expenditure obligations) together makes up Rs. 160095 crore or .94% of the GDP of 2017-18. Adding these expenditures to the stated fiscal deficit of Rs. 591062 crore, makes the actual Fiscal Deficit for the year 2017-18 at Rs. 751157 crore, which was 4.39% of the nominal GDP.

Thus, the actual Fiscal Deficit of 2017-18 was Rs. 751157 crore or 4.39% of GDP.

What were the Debt and Liabilities and Fiscal Deficit for the year 2018-19?

Provisional Fiscal Deficit of FY 2018-19 as the Provisional Accounts released by the Controller General of Accounts (CGA) is Rs. 645367 crore. We add three types of expenditures for the year 2018-19, like in case of 2017-18, i.e. equity investments in PSBs and EXIM Bank made during the year 2018-19, food subsidy expenditure met in cash loans from the NSSF and revenue and capital expenditure under various programme by issuing fully service bonds. During the year, the Government agreed to provide Rs. 6000 crore of equity investment in Exim Bank funded by Exim Bank investing the equal amount in special securities issued by the Government of India. Rs. 4500 crore of such investment was made during the year 2018-19. The Government provided a total of Rs. 1.06 lakh crore by way of “recapitalisation bonds” to public sector banks, including Exim Bank. Further, Rs. 70000 crore was provided from the NSSF to FCI to cover the food subsidy expenditure. Fully Service Bonds issues ballooned during the year 2018-19 with total amount of FSBs issued amounting to Rs. 64192.10 crore (as per the statement on fully service bonds in the Expenditure Profile of the Budget Documents). Expenditure under all these three heads amounted to Rs. 240192 crore, which is legitimately part of the fiscal deficit of the year. Thus, actual fiscal deficit in 2018-19 was not less than Rs. 885559 crore. This amounted to 4.66% of GDP of Rs. 190.10 lakh crore for the year.

The Status Paper on Government Debt for 2019 is still not published by the Ministry of Finance. However, the Government provide information about the total debt and liabilities of the Government of India, as per the convention and concepts used in the Status Paper on Government Debt, in the quarterly report on Public Debt Management published every quarter. As per the Quarterly Report released for the January-March 2019 quarter released by the Ministry of Finance, total Debt and Liabilities of the Government of India at the end of March 2019 was Rs. 8468086 crore. This exceeded the liabilities at the end of FY 2017-18 by Rs. 669238 crore. There seems to be some definitional issue about this number. Special Securities issued by the Government to fund equity infusion in the public sector banks (this year EXIM Bank was also included) is always added in the Debt and Liabilities of the Government of India, both in budget papers and also in the Status Paper on Government Debt. If only these recapitalisation bonds of Rs. 1.06 lakh crore are added to the provisional fiscal deficit of Rs. 6.45 lakh crore (as reported by CGA), the debt and liabilities should be increased by 7.51 lakh crore. We will await the actual release of the Status Paper for 2018-19 to make assessment of the actual debt and liabilities of 2018-19. For the present, it would suffice, if we add the three expenditure (as in previous paragraph) i.e. Rs. 2.40 lakh crore to the provisional fiscal deficit of 6.45 lakh crore. It then becomes Rs. 8.85 lakh crore. Adding this number to the previous year’s debt and liabilities of Rs. 78.28 lakh crore, we place the total debt and liabilities provisionally for the year 2018-19 at Rs. 87.13 lakh crore, which is 45.83% of the provisional GDP of 190.10 lakh crore of 2018-19.

Total Debt and Liabilities of the Government of India, as per our provisional assessment increased from Rs. 78.28 lakh crore in 2017-18 to Rs. 87.13 lakh crore rising marginally from 45.79% of GDP to 45.83% of GDP.

POLICY ISSUES CONNECTED WITH THE FISCAL DEFICIT, DEBT AND LIABILITIES OF THE GOVERNMENT OF INDIA

Should India worry about fiscal deficit or debt of the Government?

Savings made out of the incomes earned by the people and credit created by the banking system form the financial capital- equity and debt. New investments in fixed capital formation and productivity building technologies, financed from this financial capital is the bedrock of growth. Therefore, the savings from the people would be best used in the cause of nation building and people’s welfare, if the same get deployed in capital formation.

Isn’t capital expenditure by the Government right justification for running fiscal deficits?

Government’s primary task is to deliver governance services, which are public goods, to people paid for by revenues collected from taxes. This includes services to redistribute incomes to poor, marginal and disadvantaged sections of Indian society. All these services are of consumption nature and don’t lead to capital formation for raising productive capacities of the economy. Therefore, government should normally not run any fiscal deficit. In India, we have raised a large public sector which is engaged in productive parts of the economy. Equity infusion in such public sector companies was made by the Government. Government also support creation of public infrastructure through its agencies. Such capital expenditure also aids to the productive capacities of the country. Therefore, capital expenditure to support investment in public enterprises and to fund infrastructure creation through Government agencies seems quite justified for being made from the public exchequer. This justifies raising of debt by Government for incurring such expenditures.

Unfortunately, over the years, Government’s borrowings have been increasingly used to fund consumption expenditure and a considerable part of capital expenditure incurred is actually no on creation of productive capital assets. In the year 2019-20, the Government has budgeted a fiscal deficit of Rs. 703760 crore. Expenditure budgeted as Capital Expenditure is only Rs. 338569 crore. It is only about 48% of the fiscal deficit. As fiscal deficit represents borrowing, more than half of the borrowings, even in terms of budgeting, is meant to be spent on consumption expenditure. Almost similar was the situation in the year 2018-19 RE. Less than half of the borrowings only are meant to be used for capital expenditure. Actual position usually turns out to be still worse. In 2017-18, actual amount spent on capital expenditure was Rs. 263140 crore out of the fiscal deficit of Rs. 591062 crore which was only 44.5%.

What exactly constitutes the capital expenditure? The largest item of capital expenditure is a provision of Rs. 1.03 lakh crore for Defence Expenditure. Buying of weapons and other means of warfare are extremely important for national security but these don’t raise productive capacity of the economy. This expenditure is a little less than 1/3^rd of entire capital expenditure. There are funds budgeted for supporting infrastructure construction by Government agencies. Equity contribution for Metro Projects (Rs.17.7 thousand crore), Capital Contribution to Railways (Rs. 65.8 thousand crore), Capital Works of National Highways (Rs. 36.7 thousand crore) and other Road works of Ministry of Road Transport (Rs. 35.4thousand crore) fall in this class and certainly appears quite justified. Capital outlay of Rs. 21.01 lakh crore is budgeted for Nuclear Corporation (Rs.3000 crore), Food Corporation of India (Rs. 1000 crore), for investments in multilateral financial institutions (Rs. 5500 crore), for other financial institutions like NIIF (Rs. 4000 crore), for construction of police housing (Rs. 1900 crore under Police Research) and for other contribution of Rs. 1260 crore to CPSUs) seem partly for creation of productive economic capacity and partly for supporting current operations. Capital expenditure under two broad heads-i. Establishment (Rs. 7.5 thousand crore) and under Other Transfers (Rs.7.5 thousand crore entirely meant towards the capital assistance provided by the Central Government to the States, mostly North Eastern and other Himalayan States is clearly for aid/establishment kind of support. Therefore, only a little more than half of the expenditure budgeted as capital expenditure is actually justifiably capital expenditure. This leads to the conclusion that less than 25% (only 48% of fiscal deficit is budgeted for capital expenditure) of fiscal deficit is meant for productive economic investment in manufacturing, services or infrastructure capital investment.

As seen in earlier section, considerable amount of expenditure (largely of consumption nature) is incurred outside budget (food subsidy bill paid through NSSF, toilets/other assistance through Fully Serviced Bonds etc.). A number of public interest motivated people propose that, in times of economic slowdown, the Government should not worry about fiscal deficit and borrow funds for incurring capital expenditure. It is impossible for the Government to incur capital expenditure quickly. Going by the actual state of affairs, it is difficult to justify raising of debt, or running of large fiscal deficit by the Government, on the ground of making it for the capital expenditure.

How has gross pre-emption of financial savings affected growth? Growth enhancer or growth depressing?

India’s savings rate of about 30% is quite a decent savings rate, though one can always wish that India saves a lot more. However, it is only the financial savings of households and that of the financial institutions which are available for funding the fiscal deficit of the Government. These financial savings should ideally be used for funding equity investment of real sector enterprises. Converting these savings into debt does not really serve the cause of national development. Debt portion of the enterprises and even that of the Government can be funded from credit creation in the banking sector, including central bank. Trouble however is that the financial savings of the household sector and financial sector are relatively small. Household sector saves about 16-17% of GDP in all. Only a little over 1/3^rd of it (6.6% out of total household sector’s savings of 17.19% of GDP) in 2017-18, the last year for which data are available presently was the net financial savings of the household sector.

When the Central Government and the State Governments run large deficits- in excess of 6-7% together, a large chunk of financial savings of people get diverted to meet this fiscal deficit. In fact, entire financial system, consciously and unconsciously, get tooled/rigged to serve this objective of landing these savings in the Government. Today, Banks are required to keep about 20% of their deposits in government securities. Insurance companies are also like this. LIC had investment corpus of Rs. 28.75 lakh crore in the policy holders account as on 30^th June 2019. As much as 18.84 lakh crore (more than 65%) of this Corpus was invested in “Government securities and Government guaranteed bonds including Treasury Bills”. The Government runs large number of small savings schemes, which also nudge household savings towards government debt. It exceeds Rs. 15 lakh crore.

The financial system works to fund the Government Debt. In the process, it leaves little for the private sector or for the productive investment in the economy. As the demand for financial resources is much higher than its availability and a large chunk of it gets directed towards financing government debt, the price for the financial resources, interest, in the economy refuses to budge down. The spread between the policy rate and the bank lending rates remain quite high (over 400 basis points) in the country. There is rush today for Indian corporates to go abroad to borrow. While the flow to commercial sector from the financial system is down by over 70% in the first half, Indian corporates borrowed more than 30 billion dollars in external commercial borrowings and bonds in the year 2019.

The load of government borrowings or the fiscal deficit needs to be reduced in the larger interest of the economy instead of the fiscal deficit being relaxed even in the current situation of economic slowdown.

Should the Small Savings/ National Small Savings Fund (NSSF) be wound up?

Government of India provides a number of savings avenues to individuals and households in the form of national savings certificates, public provident fund account, kisan vikaspatra, savings and other deposit facilities in the post offices and some dedicated schemes for girl child, senior citizens and the like. These schemes are operated mostly through the Indian Post Department, with its multitude of post offices all over the country and some schemes through the banking system as well. Aggregate deposits/balances in these small savings accounts at the end of FY 2017-18 was Rs. 12.90 lakh crore. These are estimated to be Rs. 16.85 lakh crore at the end of FY 2019-20 as per BE 2019-20. Outstanding amount of all small savings deposits, certificates and accounts as on 31st March 2019 was estimated to be Rs. 14.81 lakh crore as per Revised Estimates given in the Budget 2019-20. The small savings outstanding balances are estimated to be growing by about 2 lakh crore every year during last two years.

The savings of people invested in the NSSF, like their savings invested in the mutual funds, are in a way, assets under management of the Government. As the AUMs with all the mutual funds was about Rs. 25 lakh crore at the end of 2018-19, the AUMs under NSSF at about Rs. 15 lakh crore make a significant share of people’s savings. Unlike Mutual Funds though, the Government invests these savings inflows with the Governments, now mostly Central Government as States have stopped taking these inflows citing higher costs thereof, and of late, the PSUs and Authorities of the Union Government.

There are primarily four ‘investment avenues’ for the small savings flows presently- a. investment in special securities issued by the Central Government, b. investment in special securities issued by the State Governments, c. investment in public enterprises and authorities of the Government of India and finally d. meeting fiscal deficit by providing cash balances. In addition, there is liability of the Central Government towards accumulated losses in the NSSF. The Central Government issues three kinds of special securities to the NSSF- a. Against the Balances lying on 31.3.1999, the day when the NSSF arrangement came into being (earlier the Government of India used to provide small savings loans against accruals of small savings in the States from the Consolidated Fund of India, b. against fresh accumulations in the NSSF from April 1, 1999 and c. against redemption of special securities by the Centre and the State Governments. At the end of March 31, 2018, the net investments in these three types of securities was Rs. 64567 crore, Rs. 134969 crore and Rs. 284381 crore, in total amounting to Rs. 483919 crore. Outstanding balance of securities issued by the States as on 31st March, 2018 amounted to Rs. 507245 crore.

The Central Government started making use of funds in the NSSF to provide loans to the Central Government entities from the FY 2016-17. First such loan was made to the Food Corporation of India when Rs. 70000 crore loan was extended (repayable in 5 annual instalments) in lieu of food subsidy claims of the FCI for the year 2016-17. During 2017-18, this practice was extended to other PSUs and authorities for both investment as well as subsidy support purposes. Investment loans were made to NHAI (Rs. 20000 crore), IRFC (Rs. 10000 crore) and Air India (Rs. 3000 crore). FCI was provided another loan in lieu of subsidy of Rs. 65000 crore, while FCI paid Rs. 14000 crore. A loan of Rs. 8000 crore was extended to cover housing subsidy claims. In all, the Loans to Public Agencies grew to Rs. 162000 crore at the end of 2017-18.

NSSF pays the interest cost on various savings instruments. It also pays a commission charge to the Department of Posts for managing the small savings portfolio. Interest from the securities issued to the Central Government and State Governments make up the income of the Fund. The Difference is loss for the NSSF. In 2017-18, NSSF’s income was Rs. 95400 crore, whereas its interest expenditure was Rs. 91222 crore and its management expenses (commission to the Department of Posts) Rs. 10822 crore which resulted in a loss of Rs. 6643 crore.

Government had adopted a policy decision many years back that the interest rates payable on different savings instruments would be aligned to the market interest rate on similar instruments. A small mark up only was to be added. A system got built in which interest rates were to be adjusted every quarter. However, this system of auto alignment of interest rates of small savings with the market rats, has not practiced more in breach during last few years. Interest rates have been virtually left untouched during the current financial year despite policy rates, rates on central government securities and other market instruments having come down notably. At the end of first quarter in June 2019, there was a nominal adjustment of .1%. There was no change in the interest rates at the end of September and December quarters. Interest rates on small savings instruments, with the safest security, are the highest compared to savings instruments of similar instruments even on nominal terms. If tax incentives associated with such savings instruments are taken into account, the effective rates are150% to 200% of the instruments of similar nature.

During the current year, the Government has announced corporate tax cuts and there is also considerable shortfall in collection of excise, customs, GST and personal taxes. The Government, however, has not revised borrowing programme, which remains pegged to fund fiscal deficit of 3.3% of GDP only. It seems that the small savings collections are being encouraged retaining the interest rates at higher levels to fund the higher fiscal deficit of the Government.

The justification for small savings schemes being run by the Government does not exist any longer. In this day and age of digital banking enabled by omni-present mobile phone networks, there is hardly any need for the Government to provide an avenue to park the savings. The post offices met this need in 20^th century, but are no longer required to play this role. With almost universal Jhan-Dhan accounts with the banking system (time has come to convert these zero minimum deposit accounts into normal savings accounts to enable poor people to use entire set of banking services), there is absolutely no necessity for the savings banks account services to be provided by the post offices.

Besides running smaller fiscal deficit, the Government should wind down the system of small savings. Incidentally, no state government (barring two-three who are also interested to get out) is now taking small savings these days. For many years, until the beginning of the first decade, there used to be big clamour to fund the state government deficits with small savings. All these savings are now landing with the Government of India. These small savings also interrupt the system of rate transmission in the banking system. Banks are unable to compete with these rates but cannot bring down their rates for transmitting the monetary policy signals as they would lose out the savings completely. The small savings system distorts the savings system in the country.

The Government should implement a five-year plan to wind up the small savings system.   

Does Fiscal Deficit end up only financing massive Interest Payments- consequent of overload of debts and liabilities?

Government of India has been following the policy of raising debt for financing its fiscal deficit by raising it from the market at market rates of interest for more than two decades. Present policy and practice are a far cry from the distortionary and off market policies and practices of 20th century, which caused lot of inflation, expropriated all savings for the Government and made the monetary policy completely redundant. Very early in 1950s, the Government of India had decided to issue adhoc treasury bills on the Reserve Bank of India mandating the RBI to fund as much as resources as Government of India needed by creating money. Rate of interest paid on such adhoc bills was also kept very low. RBI was not generating any meaningful surpluses in this era. In 1990s, the practice of issuing ad-hoc treasury bills was laid to rest. RBI and the Government agreed that the RBI will not subscribe to primary issuance of debt of the Government and would only operate a limited Ways and Means Advance (WMA) facility. RBI has dismantled various instruments used earlier to ensure flow of funds to GOI securities- very high SLR being one of these. Securities of the Government of India and also that of the State Governments are now issued at price discovered in the market.

The Government of India, on its own account, is a very large debt issuer. A large stock of debt securities have now built with GoI’s total Debt and Liabilities exceeding 45% of GDP. Large pre-emption of savings and credit created in the economy by the Government leads to interest rate ruling very high. All this has led to the interest expenditure of the Government of India balloon.  Government of India classifies interest payments in five broad heads- interest on internal debt, interest on external debt, interest on provident funds and other specific accounts in public account, interest on reserves funds and interest on other liabilities. Interest on internal debt constitutes bulk of interest payments now. In 2017-18, interest on internal debt amounted to Rs. 487527 crore, which was 89.71% of total interest paid (Rs. 543404 crore). Interest on market loans (usual dated long-term market securities issued by the Government of India) amounted to Rs. 404132 crore (74.37% of total interest paid). Interest on External Debt is quite small now as such loans on Government of India account are stabilized and will decline going forward. Only an amount of Rs. 5951 crore was paid on this account. As Provident Fund deposits grow at a steady rate only, interest payments under this head are also small and growing at very slow rate. In 2017-18, it amounted to Rs. 33135 crore, which actually had a negative growth rate of 2.48% over the interest paid under this head in 2016-17. Government of India earns some money usually as premium on the government securities issued. Likewise, it also earns some interest on market loans. The Finance and Accounts state this income on the revenue side, whereas Budget Papers and Analytical Reports display the interest payment net of these incomes. In 2017-18, such net receipts were about Rs. 14755 crore, which when netted made the net interest expenditure to be around Rs. 528600 crore.

Interest on Other Obligations actually represent the result of by-pass on fiscal deficit financing attempted from time to time by the Government of India. Interest paid on this head during 2017-18 was Rs.15975 crore. It included interest on Petroleum Bonds (Rs. 9583 crore), interest on special securities issued to Food Corporation of India (Rs. 1319 crore), to Oil Marketing Companies (Rs. 407 crore), interest on bonds issued to fertiliser companies (Rs. 1174 crore) and interest paid to SBI for the GoI bonds subscribed by SBI for enabling GOI to invest in the rights issue of SBI (Rs. 835 crore). Almost all of these obligations were taken on by the UPA Government between 2004-05 to 2012-13). NDA Government has also resorted to this route for recapitalizing the Public Sector Banks and also other financing institutions like EXIM Bank and IIFCL ltd. These bonds were first issued in 2017-18. First interest obligations for this came up for payment in 2018-19. As further bonds were issued in 2018-19 and 2019-20 and by now the amount of bonds issued exceed Rs. 215000 crore, interest payment on these obligations would exceed entire interest payment made during 2017-18 in this head.

Expenditure on interest payments is the largest head of payment and a little less than 25% of total expenditure of the Government of India. About 1/4^th of all the resources which the Government of India raises every year, tax, non-tax and debt all taken together, goes only to service interest on the debt and liabilities undertaken by the Government of India in previous years. This is an extra-ordinary large pre-emption of resources. In 2017-18, interest payment at Rs. 528900 crore out of total budgetary expenditure of the Government at Rs. 2141973 crore was at 24.6% of total expenditure. This has seen minor decline in the year 2018-19 as per the provisional numbers released. In this year, net interest payments amounted to Rs. 582675 crore out of total expenditure of Rs. 2311422 crore exceeding 25% of total expenditure at 25.21%.

With the Government being in no position to curtail fiscal deficit and issuance of liabilities outside the Budget also continuing unabated, there is every likelihood that the interest payment in 2019-20 will also exceed 25% of total expenditure.

Combined expenditure of the Central Government (actuals) in 2017-18 on interest payments (Rs. 528952 crore) and establishment (Rs. 473031 crore) was Rs. 1001983 crore, which turned out to be in excess of 45% of the total expenditure of Rs. 2141973 crore incurred. It needs to be remembered whenever we talk about the ability of the central government to adjust its expenditure that very close to half of all expenditure is simply not in control of the central government. It is the first charge on the revenues and debt raised and has to be so paid.

Mostly the interest burden implications of running large fiscal deficits are ignored. Decisions to recapitalize the PSBs’ equity by issuing special securities without considering the net impact on fisc in terms of the interest paid on these bonds are sub-optimal decisions.

Gargantuan burden of interest payment is a good reason to consider moderating fiscal deficit and debt overhang.

Is India’s credit rating affected by the large deficit and debt overhang?

Sovereign credit ratings are quite material in determining access to internal credit and also the price at which such credit can become available to sovereign, sub-sovereign and private corporates. Indian corporates- in public and private sectors have borrowed close to $30 billion dollars in 2019 from international debt markets. India has investment grade sovereign debt rating from all the major rating agencies. Sovereign credit rating works as the base of credit rating for the corporations. No corporate from India can get a rating better than the sovereign’s credit rating.

Fiscal Strength is one of the three major rating parameters, which in case of Moody’s feeds in determining Government’s Financial Strength. India’s Financial Strength has been rated consistently for quite sometime at M+ level i.e. a medium strength. The biggest weakness in the metric of Fiscal Strength is very large debt burden. India’s general government debt and liabilities ( a little less than 70%) is one of the highest in comparably rated sovereigns. Deterioration in fiscal metrics is considered one of the largest negative credit event. Therefore, worsening fiscal deficits and/or perception that India’s is unlikely to stick to its path of moderating stock of debt and liabilities to less than 40% for the central government by 2024-25 is likely to put India’s credit rating at a risk. Moody’s which upgraded India’s rating to one notch further in the investment grade has recently placed India on negative outlook. It would be big negative if India’s credit rating were lowered to the lowest investment grade by the Moody’s.

Will the FRBM Act be violated again?

Ever since FRBM Act was enacted in 2003-04, India has revised and reaffirmed its commitment to that elusive fiscal deficit target of 3% of GDP three times. The last restatement was made in 2018-19. FRBM Act was amended by the Finance Bill 2018 to very specifically state two commitments. One, India would reduce its fiscal deficit to 3% by FY 2020-21 and maintain it at or lower level thereafter. Second, Union Government’s Debt and Liabilities would be brought down to less than 40% of GDP by FY 2024-25.

Fiscal developments in last two financial years since then have not gone to ensure that these two statutory commitments could be adhered to. India revised its fiscal deficit from 3.2% in FY17-18 BE to 3.5% in FY17-18 (which was also the actual) and announced its headline fiscal deficit at 3.3% for FY 2018-19 (there were some expenditures/ investments pushed off-budget, which has been explained above). Expectation was that there would be some further compression in 2019-20 and finally the target of 3% would be achieved in FY2020-21. However, FY 2018-19 turned out to be fiscally more difficult than planned. Headline Fiscal Deficit (the number in the budget papers representing the fiscal deficit in the Consolidated Fund of India) was revised to 3.4% for FY 2018-19 (RE) and BE fiscal deficit for 2019-20 was first announced at 3.4% in the Interim Budget and later on brought down to 3.3% in the final budget presented in July 2019.

Considering the revenue and expenditure performance in FY 2019-20, it is unlikely that headline fiscal deficit would be anywhere less than 3.5%. Real fiscal deficit will be much higher. I have analysed this in the next section. Given further that the revenues are unlikely to see any sharp uptick in next FY 2020-21 and flexibility to compress expenditure is almost not available, it is almost impossible to keep even the headline fiscal deficit to 3.0% for FY2020-21.

Likewise, the debt and liabilities trajectory is moving quite in reverse direction than the one which was possibly expected while determining the deadline of 2024-25 for achieving the goal of 40% debt to GDP ratio.

It seems quite likely that the FRBM Act will be amended again to push both the fiscal deficit goal of 3% to let us say 2025-26 (to coincide with the new five yearly budgetary cycle with finance commission recommendations) and debt and liabilities goal of 40% to, let us say, 2030-31. It would be sound more convincing if this fiscal deficit goal is defined to include all budgetary and off-budgetary liabilities (which currently are around 4.5% of GDP. A five-year roadmap for brining real fiscal deficit down from 4.5% of GDP to 3% of GDP is quite reasonable and rigorous. A lot of people would become somewhat more cynical about Government’s real commitment for fiscal consolidation considering non-achievement of this goal even after 15-16 years of its original adoption and it being pushed for newer date every 5-7 years. However, if the Government were to disclose and incorporate all its fiscal expenditures into the fiscal deficit and state the fiscal road map (.25 to .3% reduction consistently every year) in the budget, the fiscal correction and consolidation would sound more credible.

Debt and Liabilities ratio to GDP is more autonomous. If the Government were to reform the small savings regime and lay down the fiscal consolidation path as suggested above, it is quite likely that the Debt to GDP ratio would also be achieved in this time-frame, most likely even earlier.

WHERE IS FISCAL DEFICIT HEADED TO IN 2019-20?

Fiscal performance in 2019-20 has been quite weak whereas Government’s tax revenue growth targets appear too ambitious. Nominal economic growth itself has fallen to 7.5% (as per first advance estimates released by CSO). Compared with the provisional/actual tax revenues of the Centre for 2018-19, the estimated tax revenues for FY 2019-20 at Rs. 16.50 lakh crore (7.82% of projected GDP FY 2019-20) are Rs. 3.33 lakh crore higher amounting to projected growth of 25.26%. Actual tax performance has been quite poor. In this, major policy decision of the Government to reduce corporate tax rates (desirable as it was considering very high corporate tax rates in the country), has also contributed in lowering the revenues in corporate taxes. Some estimates place that the corporate tax revenues are actually in the negative compared to the actual corporate tax revenues until this time last year. Personal income taxes are also growing at very small rates. GST revenues are also not very robust. There is substantial shortfall visible in excise duties and customs duties, which had very high target rate this year. There is every likelihood that there would be shortfall of Rs. 2 lakh crore, plus/minus 25000 crore, in the tax revenues this fiscal of 2019-20.

Non-tax revenues are doing quite well this year thanks to hefty transfer from the RBI. There is also good likelihood that a part of licence fee and spectrum charges arrears linked to the definition of adjusted gross revenue (AGR) accepted by the Supreme Court would flow in this financial year. There has been postponement of deferred spectrum fee due for the year. However, on net basis, there should not more inflows from telecom companies compared to the budgeted number this year. The dividend from public sector companies, including some dividend from banks this year, especially from the SBI, should turn out to be closer to the budgetary targets. Therefore, it would be reasonable to expect an additional revenue of Rs. 50000 (plus/minus 10000 crore) under non-tax revenues.

The Government initiated its biggest reform by announcing strategic sell off of BPCL, Shipping Corporation of India and Container Corporation of India. Achievement of disinvestment target of Rs. 1.05 lakh crore is not achieved even 20% by now. These three disinvestments, at about Rs. 80000 crore or so, were the biggest hope for achieving the disinvestment targets. However, it seems the process is moving slower than planned and it is unlikely that all the three, especially BPCL, which was set provide about 3/4^th of this Rs. 80000 crore, would be completed by March 31, 2020. Therefore, there is likelihood of disinvestment target being missed by about Rs. 50000 crore this year.

Taking all this together, there is likely shortfall of Rs. 2 lakh crore to Rs. 2.5 lakh crore on revenue side this fiscal 2019-20.

The Government has recently directed limiting expenditure to 25% of the budgeted amount in the last quarter of the current fiscal. Considering the nature of government expenditure (50% is establishment and interest payments) and a 65.3% of expenditure has already been incurred until November 2019, there is virtually no likelihood that the Government would be able to save anything from the budgeted expenditure of 2019-20. The adjustment of food subsidy (payment from NSSF) may likely be resorted to this year also, if the Government is not willing to show up real fiscal deficit as headline fiscal deficit.

Depending upon how, food subsidy expenditure is treated, I expect the fiscal shortfall to go up by Rs. 130000 crore to Rs. 200000 crore i.e. .6% to 1% of GDP. If some actual payments e.g. pensions etc. are aggressively pushed to next year, the shortfall might be brought down to about Rs. 80000 crore to Rs.1 lakh crore or about .4% to .5% of GDP.

I therefore expect the headline fiscal deficit number to be between 3.7% to 4% of GDP.

CONCLUSION

2019-20 has been quite a tough year for Indian economy and for the government finances. A nominal growth rate of 7.5%, virtual stagnation of manufacturing and electricity growth (there have been four months of negative electricity growth in the nine months of this fiscal so far, whereas electricity growth has been in the negative for altogether 4 months in last fifteen years prior to this fiscal), pronounced sickness in the real estate sector and stagnation of fixed capital formation would have, even in normal circumstances, led to low nominal growth of tax revenues. In such circumstances, estimated growth of tax revenues (net to centre) of over 25% over last year’s actuals was way off the mark. Further dent got made by the decision to substantially reduce corporate tax rates in the middle of the year. Thanks of larger surplus transfer by the RBI this year, non-tax revenues would make up for some shortfall of the tax revenues. But, inability of administrative system to carry through the ambitious strategic disinvestment agenda might lead to disinvestment target being missed by a half. There is not much flexibility or slack on the expenditure compression.

The Government is thus set to miss the headline fiscal deficit target of 3.3% by a reasonably wide margin. Headline fiscal deficit does not include expenditure and investments carried off-budget or by deducting debt receipts against such expenditure while accounting it. There are three broad heads of such expenditure- recapitalisation of banks and other financial institutions like IIFCL and Exim Bank, payment of food subsidy via NSSF and expenditure/ investment funded through Fully Serviced Bonds (FSBs). These three types of expenditures are likely to be between Rs.175000-225000 crore this fiscal. Including these expenditures, such gross fiscal deficit is the real fiscal deficit.

The headline fiscal deficit quite likely this fiscal FY 2019-20 is around 3.7% to 4.0% of GDP. Real (gross) fiscal deficit is likely to be around 4.5% to 5% of GDP.

2020-21 is likely to see continuation of difficult fiscal situation. India’s GDP growth is likely to remain below 6% and nominal around 9%-10%. Considering that the fiscal deficit and debt to GDP targets enshrined in the FRBM Act for 2020-21 and 2024-25 are unlikely or rather impossible to be achieved, it is likely that the FRBM Act would be amended again to push back the achievement of fiscal deficit target of 3% to a later year. Debt to GDP target could also be pushed back now although 2024-25 is little away presently.

The year 2019-20 has turned out to be very different than what was expected at the beginning of year. Every institution has got its assessment about the GDP growth so wrong. It is a lesson that our abilities to anticipate future isn’t great even now with so much of technical and analytical ability being available. However, one has to plan for the year. The Government has to place its estimates of receipts and expenditure and its classification in revenue and capital in the Parliament as part of its budget process. Government’s expenditure programme need clear assignment of allocations for the Ministries and Departments to run their programme and deliver services to the citizens. Let us hope, the budget 2020-21 turns out to be closer to what is estimated than what happened during 2019-20.

SUBHASH CHANDRA GARG

NEW DELHI 15/01/2020