Fiscal deficit – an accounting rule that helps fix it

For the current fiscal 2018-19, the union government is facing a shortfall of about Rs 90,000 crore in indirect tax collection vis-à-vis the target. This includes the deficit in GST [Goods and Services Tax] collection plus basic excise duties. A further shortfall of Rs 10,500 crore is expected in revenue from excise duty on petrol and diesel [these are not under GST for now]. This adds to Rs 100,500 crore.

Against this, the direct tax revenue is expected to be Rs 20,000 crore higher than the target. Another Rs 20,000 crore will accrue from anti-evasion measures. The extra collection from customs duty would be about Rs 14,000 crore. All put together, the government will be able to garner an additional Rs 54,000 crore. Even after taking credit of this, it will face a deficit of Rs 46,500 crore.

Add to this, the increase in subsidy payment over the budgeted amount – estimated to be Rs 12,000 crore – the overall slippage in deficit would be Rs 58,500 crore.

But, the finance minister, Arun Jaitely is unruffled. He is confident that the government will stick to the fiscal deficit target of 3.3% – come what may. When, confronted with impending slippage, he has alluded to taking recourse to ‘standard techniques’ to ensure that this is avoided. His hint was at the age-old practice of deferring major payments especially subsidies to the following year.

The government spends hundreds of thousands crores on major subsidies viz., fertilizers, food and fuel every year [about Rs 265,000 crores being the budget provision for 2018-19]. The amount is reimbursed to manufacturers/agencies viz. fertilizer companies, Food Corporation of India [FCI], Indian Oil Corporation Limited [IOCL] etc who sell these products at prices [albeit controlled]  lower than cost of procurement/production and distribution.

Even as subsidy payment obligation is being created with every unit  sale of the product continuously throughout the year, its discharge by the center – taking into account standard procedures viz. generation of the invoice, submission, processing and approval etc – normally takes time. So, payment with a lag of two months may be in order although in this age of technology which enables instantaneous transfer of funds, even this can be substantially reduced. But, the reality is worrisome.

With regard to fertilizer subsidy, the carry forward has been Rs 30,000 crore – Rs 40,000 crore or equivalent to 6 months dues. In regard to food subsidy, the situation is even more scary with pending dues to the FCI increasing from Rs 61,000 crore during 2015-16 to Rs 81,000 crore during 2016-17 and further to Rs 135,000 crore during 2017-18. During the current year, this may even cross Rs 200,000 crore which works out to more than 12 months dues. In the fuel segment, the scenario is broadly similar.

Arrears of such unprecedented magnitude is unconscionable. This might help the government of the day in balancing the budget and achieving set fiscal target but takes a heavy toll of the companies/agencies who get payments after considerable delay.

For decades, the fertilizer manufacturers have gone through unprecedented liquidity problems, huge interest burden denting profits and even suspension of production. The various measures such as fertilizer bonds issued during 2007-08/2008-09 or special banking arrangement [SBA] during 2013-14 – 2017-18 to enable them raise funds and prevent erosion in their balance sheet came with a heavy cost. For instance, there being no takers for bonds, the companies were forced to sell them at a heavy loss.

In case of FCI, apart from encroaching on limited funds of banks [which could be better used elsewhere], during 2016-17 and 2017-18, it was directed to borrow Rs 70,000 crore and Rs 65,000 crore respectively from the National Small Savings Funds [NSSF]. With continuing shortfall in allocation during current year, the agency may have to go for a third tranche of funding from the NSSF.

Ironically, during the current year, Jaitely is staring at a fiscal deficit of Rs 58,500 crore on the assumption that Rs 40,000 crore worth of subsidy dues to fertilizer manufacturers and Rs 200,000 crore dues to the FCI – rolled over from previous years – would be carried forward to the next year. Now, if even this has to be made up to ensure that the government sticks to 3.3% target, then a further denial of payments dues in the current year may be in the offing.

The finance ministry is treading on a dangerous territory. And, something aiding the powers that be is the existing methodology of accounting on cash basis. In plain words, the income/receipt is counted when the cash [or a cheque] is received and expenses are recorded when actually paid. So, the ministry decides when to pay and how much in sync with its pre-determined target.

This is unsustainable and cannot be allowed to continue indefinitely. There is an urgent need for switching over to accrual based accounting of receipts and expenses as per the recommendation of the expenditure management commission [EMC] under Dr Bimal Jalan set up by Modi – government in 2014-15 budget to recommend a road- map up for rationalizing and phasing out major subsidies.

Under accounting on accrual basis, transactions are recorded when they happen irrespective of when the money is received or paid. This will leave no scope whatsoever for fudging of accounts as expenses will necessarily have to be recorded in the year transaction has happened – regardless of actual payment. The government will then be forced to make timely payments to manufacturers [as it would have nothing to gain from fudging] thereby putting an end to the nightmare the latter have been going thru for decades.

True, the finance minister will lose the leverage to adjust the receipt and expenses the way he wants. But, this is the way forward. He should aim at achieving fiscal target through credible efforts aimed at increasing revenue and reducing expenses – especially reining in subsidy – not vide sheer window dressing.

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