FM promised truth, but the Budget lies on deficit

FM promised truth, but the Budget lies on fiscal deficit

Finance Minister Nirmala Sitharaman’s Budget confirms the apprehension that the actual fiscal deficit for 2019-20 would exceed the budget estimate (BE) by a significant margin. Sitharaman put it at 3.8% of GDP against the targeted 3.3%. She justified this saying that  the recommendation of the NK Singh committee on review of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, permitting breaching of the target in case of “far reaching structural reforms with unanticipated fiscal implications.” For 2020-21, she has put BE at 3.5% against the 3% required under the FRBM Act and offered the same explanation for this deviation, too.  

Despite the significant slippage (every 0.1% variation translates to extra borrowings of close to Rs 20,000 crore), the government’s claim that it is sticking to the fiscal consolidation roadmap is anomalous. To get the ‘real’ picture, let us take a look at the NK Singh committee’s recommendation. 

The committee was set up in 2016 to review the FRBM Act, 2003, with a mandate to revamp the Act and recommend a ‘glide path’ for the next six years. It recommended a fiscal deficit target of 2.5%, revenue deficit 0.8%, combined Centre-state debt ceiling of 60% and central debt ceiling of 40% for 2022-23. It recommended 3% fiscal deficit to be achieved during 2018-19. It also allowed the government to breach the target – by upto 0.5% — in case of “far-reaching structural reforms with unanticipated fiscal implications.” However, while acting upon the recommendations, the mandarins in the finance ministry took recourse to ‘cherry-picking.’

In the amendment to the FRBM Act vide Finance Bill 2018-19, even while retaining the ‘escape clause’ to cover unanticipated events, the government adopted the glide path of achieving 3% fiscal deficit by 2020-21 instead of 2018-19 mooted by the committee. Further, it set the debt limit of 40% for the Centre to be reached by 2024-25 instead of the committee’s mandate of 2022-23 (this may be seen in the backdrop of slippage in 2017-18, when actual fiscal deficit was 3.5% against the BE of 3.2% and the government saw no possibility of reaching 3% in 2018-19).  

Unfortunately, the government has not stuck to even a fairly generous glide path. During 2018-19, fiscal deficit was 3.4% against the BE of 3.3%. This was despite making short payments of Rs 1.32 lakh crore under major subsidy heads (food: Rs 60,000 crore; LPG and kerosene: Rs 32,000 crore; and fertilizers: Rs 40,000 crore).

Further, it directed state agencies to borrow on its behalf to build infrastructure and fund welfare schemes. Termed extra-budgetary resources (EBRs), these were Rs 2.8 lakh crore.

Put together, short/deferred subsidy payments (DSPs) and EBRs were Rs 4.12 lakh crore. Including these, the fiscal deficit for 2018-19 would have been 5.7%, or 2.3% more than the reported figure. During 2017-18 also, according to the Comptroller and Auditor General (CAG), the fiscal deficit reported was suppressed by 2.4%. 

In 2019-20, the BE at 3.3% (or about Rs 7 lakh crore) was based on nominal GDP growth of 12%. Against this, the actual growth being 8.5%, this by itself would have caused slippage of 0.1% even if the absolute deficit had remained at Rs 7 lakh crore. But the absolute deficit is projected to be about Rs 7.8 lakh crore, largely due to shortfall in tax revenue and proceeds of disinvestment, which translates to fiscal deficit of 3.8% of GDP. With 0.5% cushion from the ‘escape clause,’ the FM may be patting herself that she has stuck to fiscal discipline. But the truth is far from it!     

As in the past, the above numbers for 2018-19 don’t capture DSPs and EBRs. For food subsidy, against a requirement of Rs 2.19 lakh crore (BE: Rs 1.84 lakh crore), the Revised Estimate (RE) is only Rs 1.09 lakh crore. This implies a short payment of Rs 1.1 lakh crore to the Food Corporation of India (FCI), which arranges for procurement of food grains and their distribution at subsidised prices.

The RE for fertilizer subsidy is Rs 70,000 crore (BE: Rs 80,000 crore), unpaid dues to manufacturers would be about Rs 70,000 crore (according to the Fertilizer Association of India). Plus, with unpaid fuel subsidy bills to oil marketing companies of about Rs 30,000 crore, the total DSPs are Rs 2.1 lakh crore. 

The proceeds from disinvestment are shown as Rs 65,000 crore in the RE (BE: Rs 1.05 lakh crore) although till date, the amount garnered is only Rs 18,000 crore. One wonders from where the balance Rs 47,000 crore will come. This takes the total amount unaccounted in calculating fiscal deficit to Rs 2.57 lakh crore, or 1.3% of GDP. Including this, the actual fiscal deficit would be 5.1% of GDP (against the reported 3.8%). Including EBRs (such as loans taken by National Highways Authority of India), the fiscal deficit would be even higher.                       

The BE for 2020-21 is also riddled with substantial exclusions. For food subsidy, the BE being Rs 1.16 lakh crore, and even assuming the actual requirement to be the same as last year (Rs 2.19 lakh crore), the short payment will be Rs 1.03 lakh crore. For fertilizer subsidy, BE is kept at Rs 70,000 crore (same as RE for 2019-20), just enough to pay for the unpaid amount from the previous year.

Hence, the requirement for 2020-21 of at least Rs 80,000 crore will remain totally uncovered. The situation in oil subsidy is broadly similar.

The 2020-21 target for proceeds from disinvestment at Rs 2.1 lakh crore is a bit too ambitious. The actual realization is likely to fall short by a substantial margin. Putting all ‘exclusions’, ‘shortfalls’ and ‘EBRs’ (considering the ambitious spending on infrastructure committed in the Budget and lacking provision, this too will be high) together, even 2020-21 will end up with a fiscal deficit of well over 5% — against 3.5% shown in the Budget.    

There is no justification for invoking the ‘escape clause’ as there is no major announcement in the Budget which could qualify as ‘structural reforms.’ Therefore, the deficit of over 5% has to be seen in relation to the 3% mandated under the FRBM Act. The slippage from the glide path is at least two-thirds, or even more. 

The finance ministry has mentioned EBRs in an ‘annexure.’ This acknowledgement is welcome. But, all off-Budget liabilities need to be reflected in the balance sheet to project the real health of the Budget.

This should be followed up by long-pending ‘expenditure reforms’ to bring about sustainable reduction in spending and resultant improvement in the budgetary position.

Together with efforts to improve tax buoyancy, this should help in complying with the FRBM target. 

(The writer is a policy analyst)