CAG questions decision to do away with revenue deficit target

Comptroller and Auditor General has pulled up the government for doing away with revenue deficit targets from this financial year, which did not augur well for macro-economic stability and fiscal situation as it could lead to revenue expenditure like subsidies being met through debt.

This also meant resorting to fiscal profligacy as less of borrowed money will be available for capital expenditure, which is not a happy economic situation, warned analysts.

Though several analysts, including NIPFP economist N R Bhanumurthy, have been raising alarm bells on this score ever since the government dispensed with revenue deficit target for the first time in the budget 2018, it has now come to the fore, with Comptroller & Auditor General passing strictures on the government’s fiscal situation saying addressing revenue deficit is critical to contain fiscal deficit.

The CAG report on compliance of the Fiscal Responsibility and Budget Management Act (FRBM), tabled in Parliament in the second week of January, clearly indicated all is not well with the fiscal situation.

According to the FRBM Act, financing the gap between revenue expenditure and revenue receipts through borrowing clearly implied deferred taxation as debts raised in current financial years would ultimately be paid by collection money from taxation in future unless the government augments its non-tax revenue receipts.

FRBM Act was amended in 2018 to remove revenue deficit targets, which would be applicable for 2018-19 onwards. According to CAG, the government claimed that this strategy will not compromise on the capital expenditure since it is meeting the requirement through off-budget borrowings. This is because debt raised for the purpose would be repaid through revenue generation from such projects. Thus, both revenue and capital expenditure needs of the economy would be met.

But CAG maintained that such off-budget financing is a tool of deferring the expenditure for subsequent years. As such, the overall quantum of such borrowings remains beyond calculation of fiscal indicators. Despite being solely dependent on the government’s implicit or explicit guarantees, such borrowings are not being included in accounts either as debts or guarantees.

This meant the government is using off-budget borrowings for financing schemes and subsidy. Though the interest on such borrowing is budgeted for under the relevant head, the modality of repayment of debt or borrowing is not spelt out.

CAG analyses the trends in revenue deficit for three years from 2014-17 and finds that revenue deficit targets as mandated by FRBM Act had been met at 2.9% of GDP, 2.5% and 2.1% respectively. But these have been met by off-budget financing of food and fertilizer subsidy and CAG cites a few case studies in this regard.

In one case study, CAG clearly points out that when the budget allocation made to the ministry of chemicals and fertilizers in a financial year is not sufficient to clear all dues of fertilizer subsidies, then it is carried over to the next financial year.

As against the subsidy expenditure ₹70,592 crore, of which carry over liability was ₹26.417 crore in 2012-13. In 2013-14, the subsidy expenditure was ₹71,280 crore, of which ₹40,341crore was carried over to next year. In 2014-15, the figures were ₹ 75.067 crore and ₹31,831 crore. In 2015-16, they were ₹76,538 crore and ₹43,356 crore. In 2016-17, they were ₹70,100 crore and ₹39,057 crore.

The carryover liability is accumulated subsidies, which adversely affect cash flow of companies that have huge subsidy receivables from government. To overcome the liquidity problem of fertilizer companies, the department makes special banking arrangement in which loans from PSU banks are arranged to make payments of interest on these loans at government security (G-sec) rate. Interest rate over and above G-sec is borne by the fertilizer companies. Resorting to such special banking arrangement to improve liquidity of fertilizer companies is an off-budget arrangement for financing part of the subsidy payment, which is deferred.

CAG has done similar case studies of off-budget arrangement for subsidy payments in Food corporation of India and in the government’s accelerated irrigation programmes.

CAG warns that such off-budget financing of subsidies, which is a revenue expenditure, increases cost and understates subsidy expenditure and prevents transparent depiction of fiscal indicators of relevant year.

CAG cautioned revenue deficit, though contained within limits, constitutes a large part of fiscal deficit. This is because revenue deficit last year was around 2.1% of GDP as against the fiscal deficit of 3.3% of GDP. This meant nearly two-thirds of money borrowed goes into meeting the revenue expenditure like subsidies, thereby leaving only one third of the borrowed money for capital expenditure.

This will not boost economic development and instead slow down growth prospects.

Further, the FRBM Act as amended in 2018, which has done away with revenue deficit target, carries the risk of not addressing the critical issue of revenue deficit. As per the original FRBM Act of 2003, fiscal deficit was to be bought down to 3% of GDP and revenue deficit to zero so as to ensure that no borrowing is resorted to for revenue expenditure and all borrowings for capital expenditure to bring about macro-economic stability.

CAG also felt there is danger now of deployment of borrowed funds in areas which do not generate enough returns to cover future debt servicing needs.