An insight into the deteriorating quality of budget balancing in India

Officials say off-budget borrowings will be reduced eventually, but not any time soon

Even before the Covid-19-induced shutdown, India was already witnessing a demand and consumption slowdown across sectors. This had an impact on the tax and divestment revenues, while non-tax revenues were saved by the Reserve Bank of India’s record transfer of reserves to the centre.

While presenting the 2020-21 Union Budget, Finance Minister Nirmala Sitharaman revised gross tax revenue estimates downwards for 2019-20 by a staggering Rs 2.97 trillion to Rs 21.63 trillion. Divestment targets were cut to Rs 65,000 crore from Rs 1.05 trillion. However, total expenditure was cut by just around Rs 88,000 crore.

Citing the slowdown, Sitharaman expanded the fiscal deficit for 2019-20 to a revised estimate of 3.8 per cent of GDP from 3.3 per cent targeted earlier. It should be noted that the nominal GDP projections for 2019-20 were brought down to Rs 204.4 trillion from the earlier estimate of Rs 211 trillion.

Behind these numbers lies another story in another part of the same budget. For the first time, the Centre decided to be transparent about its off-budget borrowings. These are revenues mobilised through market borrowings by government entities, which are then serviced by the Centre, and drawdowns from the National Small Savings Fund.

For 2019-20, the budgeted estimate of off-budget borrowings was Rs 57,000 crore. That was revised upwards to a staggering Rs 1.73 trillion. For 2020-21, the off-budgetary resources have been pegged at Rs 1.86 trillion.

“The Centre has a plan to reduce extra-budgetary borrowing over the years. The expectation was that this would be done this year onwards. But the current situation means that spending pressure will only increase in the face of dwindling revenues. One good year of healthy tax revenues, and the quality of the fisc can improve,” a senior government official told Business Standard.

However, since this is the first time the full extent of off-budget borrowing has been shown, there are no official estimates of how big extra-budgetary borrowing was in the previous years, thus raising questions on the quality of official fiscal deficit. Some independent studies have tried to show the full extent.

As per a report by Motilal Oswal in July 2019, the Centre’s real fiscal deficit in 2018-19 was a staggering Rs 11.9 trillion, or 6.3 per cent of gross domestic product, if one includes outstanding arrears on account of subsidies (off budget revenue spending) and off-budget capital spending by government agencies like Nabard, NHAI, IRFC, PFC and REC Ltd.

This compares to the 2018-19 provisional actual fiscal deficit reported by the government of Rs 6.45 trillion, or 3.4 per cent of GDP. In absolute terms, the difference between the two numbers indicates that the size of off-budget financing last fiscal was around Rs 5.5 trillion.

As per the report, off-budget subsidy burden in food was Rs 1.9 trillion, in fuel it was Rs 34,900 crore and in fertilizer it was Rs 26,200 crore.

“While the reported subsidy bill at 1.26 per cent of GDP in FY19 was the lowest since FY01, off budget subsidy burden – according to our calculations – was 1.31 per cent of GDP in FY19, slightly higher than the reported subsidy bill and also the highest in a decade. Total subsidy burden, including the unpaid arrears, thus amounted to 2.58 per cent of GDP – the highest in three years,” the report said.

“Off-budget capital spending for almost two decades until FY17 was rarely above 0.5 per cent of GDP. This channel of capital spending, however, accounted for 1 per cent of GDP in FY18 and as much as 1.6 per cent of GDP in FY19,” the report said.

It said that capital spending by the limited set of five agencies increased from an average of one third of reported capital spending between FY13 and FY17 to almost two thirds in FY18 and about 100 per cent in FY19. This sort of disproportionate dependence on extra-budgetary resources to finance fiscal investments raised questions over the need of such off-budget transactions and the sanctity of the reported deficit numbers.

“The combined adjusted fiscal deficit of the general government (center + states), thus, was at seven-year high of 8.8 per cent of GDP in FY19, as against the reported fiscal deficit of 5.9 per cent,” the report stated. 

Increased reliance on off-budget financing
Item	FY17	FY18	FY19
Off-budget revenue spending (Rs cr)	1,32,900	1,69,800	2,49,400
Off-budget capital spending (Rs cr)	76,300	1,70,000	2,98,400
Reported fiscal deficit (as % of GDP)	3.5	3.46	3.4
Adjusted fiscal deficit (as % of GDP)	4.79	5.45	6.28
Source: Motilal Oswal Research