Bidding Good-Bye to Off-Budget Borrowings and FRBM Law

 

BUDGET 2021-22

BIDDING GOOD-BYE TO OFF-BUDGET BORROWINGS AND FRBM LAW

 

 

Subhash Chandra Garg

Economy, Finance and Fiscal Policy Strategist; Former Finance Secretary, Government of India

 

Speaking eloquently about the sequential improvements in the efforts of the Government about disclosures for the off-budget borrowings, Finance Minister proposed “to discontinue the NSSF Loan to FCI for Food Subsidy”. In the details of extra budgetary resources, commonly called off-budget borrowings given at the annexure VI of the Budget Speech, there is lesser issuance of ‘fully serviced bonds’ (Rs. 31,459 crore in FY20-21RE against Rs. 49,500 crore planned in BE20-21- actual in FY19-20 only Rs. 22006 crore) and lesser lending from the National Small Savings Fund (NSSF) to fund revenue expenditure of government, (Rs. 94,636 crore in RE20-21 against planned Rs. 136,600 in BE). For the FY21-22, there would be no issuance of fully serviced bonds and the funding from NSSF would also be reduced to only Rs. 30,000 crore.

 

The off-budget expenditure of Rs. 94,636 crore through NSSF in the RE20-21 comprises of two items- Rs. 84,636 crore to FCI for food subsidy and Rs. 10,000 to Building Materials & Technology Promotion Council, an SPV under the Ministry of Urban and Housing Affair, for affordable housing subsidies. Separately, the Government has revised the allocation for food subsidy to FCI (from Rs. 77,983 crore in BE20-21 to Rs. 344,077 crore in RE20-21) and for decentralised procurement (from Rs. 37,337 crore in BE20-21 to Rs. 78,338 crore in RE20-21). Taking all the provisions of food subsidy made in NSSF and the demands of the Department of Food and Public Distribution, the Government has enhanced the provision from Rs. 251,920 crore in BE20-21 to Rs. 507,051 crore in RE20-21, recording an increased food subsidy provision of Rs. 255,131 crore. For the FY21-22, budget provision of Rs. 242,616 crore has been provided for food subsidy.

 

The NSSF accounts present further details about the loan payment from NSSF to FCI for food subsidy and the repayment of the NSSF loan. There was an opening balance of outstanding loans from NSSF to FCI for food subsidy of Rs. 254,600 crore as on April 1, 2020. Further loans of Rs. 84,636 crore have been provided for in the RE20-21 and repayments of Rs. 220,524 crore have also been included in the NSSF accounts. This would leave the balance of NSSF loans to FCI of Rs. 118,712 lakh crore at the end of the FY20-21. The information available in NSSF accounts suggest that Rs. 55,000 crore would be repaid in FY21-22. Presumably, the remaining Rs. 63,712 crore would be repaid in FY22-23.

 

Reading all these pieces of information together means:

 

1.    The Government has provided an amount of Rs. 242,616 crore in BE21-22 for food subsidy as revenue expenditure in the demands of the Department of Food and Public Distribution. There is no provision for payment of any food subsidy to FCI in the NSSF estimates for FY21-22 but there is a provision for repayment of Rs. 55,000 crore in the NSSF estimates. Therefore, the estimated food subsidy for FY21-22 is Rs. 1,87,616 crore.

 

2.   2. Estimated food subsidy bill for FY20-21 is the amount of food subsidy provision in the RE budget of the Department of Food and Public Distribution minus the net repayment from FCI in the NSSF accounts. As the NSSF accounts record repayment by FCI of Rs. 220,524 crore and disbursement of Rs. 84,636 crore, the net repayment to NSSF for food subsidy is Rs. 135,888 crore. As the total food subsidy provision in the RE budget of the Department of Food and Public Distribution is Rs. 422,415 crore (Rs. 344,077 crore for FCI and Rs. 78,338 crore for decentralised procurement), the estimated food subsidy bill of FY20-21 works out to Rs. 286,527 crore.

 3. The Government will clear the outstanding NSSF food subsidy loan of Rs. 254,600 crore in the beginning of FY20-21 by repaying net Rs. 135,888 crore in FY20-21, Rs. 55,000 crore in FY21-22 and remaining Rs. 63,712 crore in FY22-23 or later.

 

4. With the Government providing for full food subsidy bill of Rs. 286,527 crore for FY20-21 and of Rs. 242,616 crore for FY21-22 and begins the process of repaying outstanding NSSF loans to FCI, it is reasonable to expect that the Government has turned a new leaf in the transparent payment of food subsidy expenditure. Further, while it will take two more years (2021-22 and 2022-23) to clear off past food subsidy obligations, it is hoped that the Government does not resort to the skulduggery of paying food subsidy bills by giving loans to FCI from NSSF.

 

The extra budgetary resources statement attached to the Budget Speech mentions about Rs. 30,000 crore to be given from NSSF during FY21-22. There is, however, nil amount allocated specifically for Building Materials & Technology Promotion Council, which was used to fund urban affordable housing scheme deficit subsidy, or for that matter any other government expenditure. While there is no additional provision in the budgets of the Ministry of Rural Development or the Ministry of Urban Development for affordable housing subsidy, it is presumed that additional funds needed would be provided for from the budget of the Ministry concerned during the year and the Government would not resort to providing loans from NSSF again or raise it from the market using institutions like NABARD and the like. While there is no inclusion of ‘fully serviced bonds’ financed programme for the year 2021-22, existing stock of such bonds would only be cleared when these bonds mature.

 

The Budget 2021-22 cleans up the augean stables of off-budget borrowings.  The Budget charts out a two-year path for clearing off-budget loans from NSSF to FCI. The fully serviced bonds off-budget liabilities would be cleared in due course upon maturity. Let us hope that the Government does not fall prey to the temptation to raise public expenditure funds by way of either issuing any more fully service bonds or borrow from NSSF or any other financial institution.        

Cleaning up of off-budget liabilities has implications for the deficit financing and the fiscal responsibility and budget management obligations of the Government under the FRBM Act.

The Government had expressed strong commitment to fiscal responsibility when NDA government came to power in year 2014-15. The Government had vowed to bring down the fiscal deficit running in excess of 4.5% of GDP in 2013-14 to less than 3% of GDP, following a glide fall, in three years’ time by 2018-19.

The pressure of increasing expenditures and subdued performance of revenues made the government resort to ‘off-budget borrowings’ from the financial year 2016-17 when the fully serviced bonds (the bonds issued by a financial institution or special purpose vehicle for funding purely government expenditure outside the budget for which the Government took responsibility to service interest payments and repayments) were issued for the first time. Likewise, the practice of providing loans to FCI from NSSF in lieu of food subsidy from the budget also started in the same year. The Government did so for staying on the course of fiscal consolidation and achieve the fiscal deficit target of 3%. To reiterate its commitment for reducing fiscal deficits, the Fiscal Responsibility and Budget Management Act (FRBM Act) was amended by the Government in 2018-19 to build in a hard peg of 3% of fiscal deficit by 2020-21 and 40% of debt to GDP ratio by 2024-25.

Contrary to the Government’s intention of containing fiscal deficit, including by putting off public expenditure to off-budget, the revenue shortfall of Rs. 4.65 lakh crore, disinvestment shortfall of Rs. 1.88 lakh crores and expenditure increase of Rs. 4.08 lakh crore, including repayment of Rs. 1.36 lakh crores to NSSF for food subsidy), left no scope for the Government to stick to the path of fiscal consolidation and containing fiscal deficits. The clamour for fiscal stimulus in the wake of covid-19 and lockdown inflicted economic shock and generally sympathetic opinion for running large fiscal deficits provided the Government perfect opportunity to put all off-budget borrowings for the current year on the budget and chart out a new high fiscal deficit but no off-budget borrowing path.

The economic survey argued for the virtues of the debt funded growth. The Government delivered extra-high 9.5% of GDP as fiscal deficit for 2020-21.  Although, there is no significant expansion in real expenditures for FY 2021-22 as well, the fiscal deficit for 2021-22 has been pegged at 6.8% of GDP which will require gross borrowing from the market for the next year of about Rs. 12 lakh crore.

While FM talked about introducing an amendment to the FRBM Act in the budget speech, in effect, the FRBM Act has been given a literal burial. With the Government talking of continuing “with our path of fiscal consolidation” and intention “to reach a fiscal deficit level below 4.5% of GDP by 2025-2026”, the FRBM Act as good as dead.

The decision to discontinue off-budget borrowing system and put all government expenditure and liabilities transparently on the budget is momentous and commendable. However, the unhinging from the rigour of fiscal responsibility and budget management and discovery of virtues of debt fuelled public expenditures is entering in dangerous, and not an entirely uncharted, territory. Most attempts on this path have ended in higher growth for some time but high inflation and collapse of such debt fuelled growth soon after. Let us see which way it turns out this time.

 

SUBHASH CHANDRA GARG

05/02/2021, NEW DELHI