Quick Take | Off-budget financing: There's no such thing as a free lunch

The extension of expenditure curbs comes at a time when the Centre is deploying its expenditure primarily on welfare schemes and infrastructure

Ravi Krishnan

When election season is here, can freebies from the government be far behind? But who will pay for it? The Centre’s fiscal deficit has breached 115 percent of the budgeted amount for this year. Never fear, because the government will resort to the time-honoured practice of shuffling expenditure, deferring some subsidy payments to next year, raise money through public sector enterprises, and find the space to finance some populist scheme or the other before the polls are announced.

When it comes to creative accounting, the presiding National Democratic Alliance (NDA) at the Centre is no different from its predecessors, says a report from the Comptroller and Auditor General (CAG), that looked at government finances for 2016-17. The key point it makes is this: the government is increasingly using off-budget financing for both revenue and capital funding. Such off-budget financing is not reflected in the fiscal deficit and public debt numbers. Not only is using such methods opaque, they are also outside the control of Parliament, contends the CAG.

Essentially, the government is able to understate its expenditure by getting public sector units to spend money, which would otherwise have been part of the budget. As a result the total liability of the central government at the end of FY 2016-17 is actually 50.5 percent of GDP rather than 45.5 percent reported by the Centre, according to the CAG.

Why should one care?

Using the off-balance sheet route has two implications. One, although it might not be indicated in the official fiscal indicators, an increasing amount of such borrowing by state-backed institutions will crowd out the private sector and raise the cost of borrowing.

Second, it leads to creation of future liability and increases the interest payment involved. In effect, the government of the day is kicking the can down the road for some future government to pick up the bill.

Just this year, the government is planning to raise Rs 1.7 lakh crore via the extra-budgetary resources (EBR) route – essentially getting subsidiaries such as public sector units to raise money and spend. This is double the amount raised in FY 2017-18.The use of this route will only increase as the government struggles to stick to fiscal deficit targets while trying to fund much-needed social sector and welfare schemes. But since there is no such thing as a free lunch, taxpayers down the road will have to pay up.

How can one stop the fudging?

One way is for the government to become more transparent by clubbing all these off-balance sheet items and presenting it in the budget. The UK presents a consolidated number called the public sector borrowing requirement (PSBR).  Such a number will not only present the true picture but also prevent some of the more creative accounting gimmicks. For instance, now, the government tries to meet its disinvestment target by getting one public sector entity to buy another. But if PSBR is calculated, the net change will be zero. What’s more, the government must also give a clear picture of all its contingent liabilities.

Ultimately, presenting a true picture of finances will also force the government to not stray off the path of fiscal prudence.