Fiscal deficit

The new fiscal arithmetic

Print edition : March 01, 2019

Cable operators protest against GST in Hyderabad in December 2018. The "game-changer" tax has seen receipts falling short of Budget Estimates by Rs. 1,00,000 crore. Photo: G. Ramakrishna

Over the years, the Narendra Modi government has not only window dressed its Budgets but also relied on extra-budgetary resources and off-budget expenditures to “rein in” fiscal deficit.

When stand-in Finance Minister Piyush Goyal presented what was neither a mere vote on account nor a full-fledged Budget, he delivered a speech that sought to make up for the failure of the National Democratic Alliance government to do enough on the economic front to win favour with India’s electorate. The background to the speech was the poor economic record of the Modi-led government, which is reflected in a number of outcomes.

First, the accumulating evidence that demonetisation, besides failing to achieve any of the objectives the government could claim it served (from wiping out the black economy to ending currency counterfeiting), ended up damaging the most vulnerable, hurting small business and pushing unemployment and underemployment to a new peak, forcing the government to hold back official evidence that convincingly established that reality. The second was that the ostensibly game-changing goods and services tax (GST) proved to be a failure, with receipts falling way short of target, in addition to disrupting the operations of businesses and heaping new burdens on many final consumers. The Budget’s estimates place collections from GST at Rs.1,00,000 crore (or more than 13 per cent) below target in 2018-19. The third was that despite talk of doubling farmers’ income by 2022, the government had, in the last four-and-a-half years, left the farm sector languishing and made its first serious effort to provide farmers any real benefit through an enhanced minimum support price only in the last year of its tenure. Fourth, despite the slogans of “Make in India” and “Start Up India”, manufacturing in the country has been ailing, making growth dependent on services. And, finally, there was enough evidence that, in the midst of this failure, the government had paid off big business, especially selected cronies, including through the public banking system, leading to huge non-performing assets, a large part of which was being written off and financed with recapitalisation funds from the exchequer.

Aiming at damage control, given this background, the Budget decided to offer a set of new sops that were big in hype but small in terms of benefits transferred to each beneficiary. The real intent of the sops seems to be to woo a large section of the peasantry and the middle classes, besides the unorganised workers who have been hurt most by both demonetisation and GST. As many commentators have pointed out, the sops themselves are small recompense, if at all, for the substantial neglect of the beneficiary population. What was surprising was that even while violating norms by tinkering with the tax structure in what should have been a vote on account (presenting in essence six Budgets in a five-year term), the Budget speech wanted to declare that it had kept to the government’s commitment to fiscal deficit reduction. The fiscal deficit is placed at 3.4 per cent in 2018-19 (against a targeted 3.3 per cent) and is to remain at that level, with the slight deviation from the deficit reduction “glide path” attributed only to the need to provide some succour to the peasantry suffering from low or negative net incomes.

Interestingly, advocates and supporters of fiscal reform and “consolidation” led by international finance have more or less accepted the government’s claim that it has only marginally deviated from the budgeted deficit for this fiscal year and can prevent any further slide next year so as to return to the task of fiscal consolidation. In fact, one newspaper carried a hearsay story that besides implicitly accepting the figures attributed them to the Prime Minister’s personal insistence on fiscal “prudence”. Some have expressed “concern” about even the one-tenth of a percentage point deviation from the deficit figure in Budget 2018-19 and the failure to keep the original target of 3.1 per cent for the coming financial year.

While the absurdity of this discourse need not detain us here, what is clear is that these “experts” have both accepted this government’s fiscal arithmetic for 2018-19 and presumed that whichever government comes to power in May 2019 will stick to the deficit numbers that this “interim budget” has scripted.

There is a major presumption underlying this version of the charade that is played out at Budget time every year and has turned comic during the tenure of the current government. That is the view that we can accept at face value a set of numbers put out by a government that has shown itself willing to violate norms and convert a vote on account into a pre-election assessment of its tenure, peppered with some largesse on the tax and expenditure sides aimed at wooing voters. Moreover, this is a government that has, according to the assessment of even insiders, not only manipulated national accounts statistics to show that it has performed better than its predecessors in terms of gross domestic product (GDP) growth but has also prevented the scheduled release of at least two surveys that point to a worsening of the employment situation in the country because of its policies such as demonetisation and GST. Why such a regime should, at this crucial juncture, be honest in its accounting is by no means clear.

In fact, there is reason to believe that not just in this “interim budget” but over time during its tenure, in keeping with its tendency to further undermine all norms procedures and institutions, the National Democratic Alliance government has window dressed its budgets in multiple ways and relied in unprecedented fashion on extra-budgetary resources and off-Budget expenditures to “rein” in the fiscal deficit.

Evidence of window dressing is writ large in this Budget too. Despite claiming to have provided Rs.20,000 crore in financial year 2018-19 for the new direct benefit transfer scheme to farmers (and although even by its optimistic estimates, the receipts from GST have fallen short of Budget Estimates by Rs.1,00,000 crore), the Budget claims to be nearly on track with its fiscal consolidation exercise, which targeted a deficit of 3.3 per cent.

Cooked-up figures

Figures have clearly been cooked up to deliver this result. First, is the “revision” of GDP estimates, which by consistently hiking the size of the national cake, helps depress the ratio of the fiscal deficit to the GDP. The second is optimistic estimates about tax buoyancy. Thus, besides the optimism with regard to GST revenues, the “projected” revenue from corporation taxes in 2018-19 is now placed at Rs.50,000 crore, or 8 per cent more than the Budget Estimates. Finally, the government is providing for large on-target receipts of Rs.80,000 crore from disinvestment in 2018-19 and a higher Rs.90,000 crore in 2019-20. Surprisingly, thus far there does not seem to be evidence of success on the disinvestment front. Excluding the most recent buyback of equity by Indian Oil Corporation and Oil and Natural Gas Corporation (ONGC), disinvestment receipts are currently placed at a little more that Rs.34,000 crore in 2018-19, which is not even half-way to the target.

What is more noteworthy is the transformation of the nature of disinvestment in two directions. The first is the securitisation of public sector equity for sale in the form of exchange traded funds (ETFs), which allows putting on sale equity from multiple profitable enterprises in one bundle at prices that are attractive to investors. Receipts from the sale of ETFs accounted for more than Rs.25,000 crore of the receipts in 2018-19. The second is to squeeze out “disinvestment” receipts from public sector corporations rather than through sales of public equity to private players. Having started with sale of Central Public Sector Enterprises’ equity to other CPSEs, which culminated in the complete sale of Hindustan Petroleum Corporation Limited to ONGC in 2017-18, the government is now relying on “buybacks” by public sector enterprises (PSEs) of their own equity held by the state. Eight out of 16 disinvestment transactions in 2018-19 were “buybacks” of government-held equity by the public sector undertakings concerned. The government also plans to mobilise in excess of Rs.10,000 crore by selling its 52.63 per cent stake in the Rural Electrification Corporation to the Power Finance Corporation, which, too, it owns. Often, the public sector corporation that is buying either its own equity or that of other PSEs needs to turn to market borrowing to finance its modernisation and expansion plans, having handed over its cash reserves to the state. The accounting exercise merely shifts borrowing out of the budget to other sections of the public sector.

Off-Budget financing

The other element is resort to off-Budget financing of various kinds to meet expenditures. According to a recently released Comptroller and Auditor General report, this form of financing is reflected in the deferment of fertilizer subsidy arrears through special banking arrangements; implementing the irrigation scheme (Accelerated Irrigation Benefit Programme) through borrowings by the National Bank for Agriculture and Rural Development; financing railway projects through borrowings of the Indian Railway Finance Corporation and power projects through the Power Finance Corporation; and much else. What has become the norm is the issue of special securities, varying from the recapitalisation of public sector banks and financial institutions to covering dues with special bonds such as those issued to oil bonds, fertilizer bonds, bonds issued to State Bank of India (during the recent rights issue), Unit Trust of India, the Industrial Finance Corporation of India and the Food Corporation of India. This is a transaction in which the government is providing funds to the organisation concerned and that organisation invests the money in special securities so that there is no net government capital expenditure and an increase in the fiscal deficit. However, while the transfers are netted out, interest on the securities is paid out of the Budget. As a result, interest payments in the Budget have ballooned at a faster pace than the increase in recorded government debt would warrant. In addition, a rising volume of capital expenditures are being funded by reliance on borrowing by, or the “internal and extra-budgetary resources” of, public sector entities.

And finally, the government has been relying on the direct transfer of resources from PSEs and the Reserve Bank of India (RBI) in the form of profits and dividends, which rose from Rs.91,360 crore in 2017-18 to an estimated Rs.1,19,265 crore in 2018-19, and are placed at Rs.1,36,071 crore in 2019-20. Interestingly, while dividends received from PSEs were, at Rs.45,124 crore, well short of the budgeted Rs.52,495 crore, dividends and surpluses of the RBI, nationalised banks and financial institutions are estimated at Rs.74,140 crore in the Revised Estimates for 2018-19 compared with the budgeted Rs.54,817 crore. That figure is slated to rise further to Rs.82,912 crore in 1919-20.

Manipulations of this kind have, however, not been enough for the government to make its “pro-people” sops additional to existing measures of support. Thus, while a grossly inadequate amount relative to demand of Rs.61,064 crore was spent on the National Rural Employment Guarantee programme in 2018-19, allocation for 2019-20 is placed at a lower Rs.60,000 crore. The expenditure in 2017-18 and allocations for 2019-20 for the schemes for Scheduled Castes are Rs.7,609 crore and Rs.5,395 crore, and that for Scheduled Tribes are Rs.3,778 crore and Rs.3,610 crore respectively.

Even the current government’s flagship programmes have suffered. Expenditure on the Pradhan Mantri Awas Yojana in 2017-18 was Rs.31,164 crore. The Budget for 2018-19 allocated only Rs.25,705 crore, and expenditure was a lower Rs.26,405 crore according to the Revised Estimates, and the allocation for 2019-20 is an even lower Rs.25,853 crore. The corresponding figures for the heavily advertised Swachh Bharat Mission are Rs.19,427 crore (Advanced Estimates 2017-18), Rs.17,843 crore (Budget Estimate 2018-19), Rs.16,978 crore (Revised Estimate 2018-19) and a much lower Rs.12,750 crore (Budget Estimate 2019-20).

In sum, all its efforts at window dressing notwithstanding, the Finance Ministry has not been able to provide the allocations for the income transfer for farmers and other “new” schemes, while adhering to fiscal conservatism, without cutting back on allocations of existing schemes that possibly can have much larger beneficial outcomes. In sum, the “interim budget” 2019-20 is nothing but a cynical propaganda effort. Whether a people who were promised large transfers of expropriated money into their bank accounts and huge benefits from demonetisation and received nothing will swallow such propaganda is to be seen.