CAG report on Modi government’s artifice to achieve fiscal deficit target through off-budget financing

What does the report cover?

  • CAG (The Comptroller and Auditor General) has presented its report on Tuesday 8 January 2019.
  • CAG has criticized the Narendra Modi government for borrowing through Off-Budget channels to finance capital and revenue spending in 2016-17 while maintaining deficit targets.
  • Off-budget financing is a practice that masks the true extent of fiscal and revenue deficits.
  • Audit has examined a few cases of off budget financing and analyzed impact of such operations on overall fiscal operations.
  • The present report discusses the compliance of the provisions of FRBM act, 2003 and the rules made thereunder by the union government for the financial year 2016-17.
  • Report discuss the underestimating of Public Account liability of Rs 7,63,280 crore, total liability at the end of the financial year 2016-17 would be Rs 76,69,545 crore which is 50.5 per cent of GDP rather than 45.5 per cent.
  • understatement of revenue expenditure at least by Rs 50,999 crore.

FRBM targets and achievement for 2016-17:

  • The Centre reported actual revenue deficit and fiscal deficit achievement at 1% and 3.5%, respectively, in FY17 as against the FRBM targets of 2.1% and 3.3%, respectively.

Off-budget financing sources used to cover the deferment:

The achievements are questionable though, as –

  • The accumulated carryover liabilities on account of food subsidies had increased from Rs 23,427 crore in FY12 to Rs 81,303 in FY17.
  • To cover financial requirements, FCI (food corporation of India) resorted to borrowings via-

*Bonds

*unsecured short-term loans and

*National Small Saving Funds (NSSF) loans.

  • FE recently reported that FCI has borrowed Rs 1.21 lakh crore from NSSF till March 31, 2018 as against subsidy arrears of Rs 1.35 lakh crore.
  • Other off-budget resources are made clear through the given table-

Such arrangements mean normal government expenditure was being substituted with loans in the accounts of PSUs (public sector undertakings) instead of cash on fears of fiscal slippage. These loans will have to be serviced out of the Budget later.

Why off-budget financing is not good:

Huge off-budget financing is not good for the economy as-

What should be disclosed:

CAG points out that off-budget financing should be disclosed to parliament through threefold-

 

What is CAG:

  • The Comptroller and Auditor General (CAG) of India is an authority of India.
  • Its primary role is to audit all receipts and expenditure of central government, state government and organizations which are financed by the government.
  • The CAG is also the head of the Indian Audit and Accounts Department.
  • In layman’s language, CAG is a like a ‘watchman’ of the national finance.
  • The CAG is mentioned in the Constitution of India under Article 148 – 151.

 

What is FRBM act, 2003:

  • The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003.
  • It sets targets for the government to reduce fiscal deficits.
  • The targets were put off several times.
  • FRBM Act required that the Central Government should work to attain sufficient revenue surplus and ensure prudential debt management through limits on borrowings, debt and deficits.

Objectives of FRBM act, 2003:

  • Greater transparency in fiscal operations and
  • having fiscal policy in a medium-term framework

The objectives are observed with regard to three fiscal indicators namely-

(1) Revenue Deficit

(consumption expenditure {excluding tax payments} – revenue receipt)

(2) Effective Revenue Deficit

(revenue deficit – grants for creation of capital assets)

*grants given by central government to different bodies to create capital assets are not to be considered revenue expenditure for ERD Purpose.

(3) Fiscal Deficit

(total revenue – total expenditure)

FRBM Act, 2018:

  • FRBM act 2003 is amended in 2018 along with the budget 2018-19.
  • Made by the FRBM Review Committee headed by N.K. Singh.
  • Included setting an operational target for fiscal deficit at 3% of GDP by the end of 2020-21.

What is Off-budget financing:

Off-budget revenue is not included in the regular federal budget; funded through separate agencies. That makes budget deficits seem less than they really are.

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