There has been no major event or budget announcement that could qualify as ‘far-reaching structural reform with unanticipated fiscal implications’
Even as the Finance Minister Nirmala Sitharaman prepares for the next budget, it is time to take stock of the fiscal scenario.
During 2019-20, the revised estimate (RE) of fiscal deficit (FD) was 3.8 percent of GDP against the budget estimate (BE) of 3.3 percent. In her speech on the Union Budget for 2020-21, she had justified this in terms of the recommendation of the NK Singh Committee on review of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 which permits breach of the target in case of “far-reaching structural reforms with unanticipated fiscal implications.” For 2020-21, she had set FD at 3.5 percent as against 3.0 percent as stipulated under the FRBM Act. Here also, she had justified the deviation in terms of the “unanticipated fiscal implications”.
In these two years, there was no major event or development or Budget announcement that could qualify as ‘far-reaching structural reforms with unanticipated fiscal implications’. So, the justification offered was not credible.
The impact of Covid-19 on the receipts and expenditure of the Centre started unfolding from April 2020, no doubt met the criteria set by the Committee. In fact, considering the gravity of the pandemic, the slippage was bound to be higher than the permissible threshold of 0.5 percent. But the FD as per RE in the budget for 2021-22 presented on February 1, 2021 turned out to be 9.8 percent — almost three times the BE; though, the actual was slightly lower at 9.5 percent, (courtesy, higher tax collection during February and March, 2021 than what was assumed in arriving at the RE).
The unusually high slippage of 6 percent which in absolute terms works out to about `1150,000 crore cannot be attributed entirely to the pandemic. A close scrutiny of the facts reveals that a sizeable chunk was merely a cover up for the ‘mismanagement’ and ‘slippages’- of the past as well during 2020-21.
Look at fertilizer subsidy. The BE for 2020-21 was `70,000 crore.
Against this, the RE as reported in the budget for 2021-22 was `134,000 crore. The slippage of `64,000 crore is entirely on account of the unpaid subsidy dues from the previous year. Even as this amount was presented as an integral part of the Atmanirbhar Bharat Abhiyan (ABA) stimulus package, the fact remains that this had nothing to do with measures to mitigate the consequences of Covid.
Consider food subsidy. The BE for 2020-21 was `116,000 crore. Together with borrowings of `137,000 crore by the Food Corporation of India (FCI) was supposed to fund a total requirement of `253,000 crore. The actual expenditure on food subsidy was `525,000 crore implying deviation of `409,000 crore from the BE. Against this, the Covid-19 related burden was only `134,000 crore being expenses on distributing free ration under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).
The balance Rs 275,000 crore was used to pay off the loans taken by the FCI from the National Small Savings Fund (NSSF) in the past to finance unpaid subsidy dues from the Centre besides funding from the budget Rs 137,000 crore.
Consider the power sector. Couched under ABA, Sitharaman also sanctioned `90,000 crore (the amount was subsequently raised to Rs 130,000 crore) to be given to power distribution companies (discoms) enable the latter clear their pending dues to independent power producers (IPPs) besides PSUs such as NTPC. This was a cover for the ailing discoms – a legacy problem caused by subsidized (or even free) power supply and theft in most of the states besides inflated payments under power purchase agreements (PPAs).
For 2021-22, FM has set FD at 6.8 percent of GDP or Rs 1500,000 crore in absolute terms. This is a deviation of 3.8 percent as against 0.5 percent permitted by the FRBM committee. Herein also, a good chunk cannot be related to Covid. In fertilizers, against budget provision of `80,000 crore, the actual subsidy payment is projected to be `143,000 crore – even higher than the outgo during 2020-21.
The hike is primarily due to steep increase in their global prices (current urea price at close to $1000 a ton is thrice last years’ level while di-ammonium phosphate or DAP price at $700-800 a tonis almost double). This money has only gone towards adding to the profits of companies in exporting countries such as China, Saudi Arabia, etc.
The budget allocation for food subsidy during 2021-22 is put at Rs 243,000 crore. Against this, the actual outgo is expected to be about `330,000 crore. This includes `147,000 crore towards distribution of free ration under PMGKAY initially during May-November, 2021further extended till March 31, 2022. When seen in the backdrop of fast economic recovery, extension of the scheme particularly during the second half of the year, is inexplicable.
In the power sector, despite the `130,000 crore life-line given last year, discoms continue to be in the red even as they currently owe about `100,000 crore to IPPs/PSUs. It is therefore not surprising that the Government would release funds to the beleaguered discoms-albeit under the ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD) (launched last year, though its stated objective was ‘to reduce their losses and improve efficiency’, in reality, the intent is to cover up their financial weakness) — before the year ends.
In the run up to the Budget for 2022-23, available indications point towards the Government continuing with fiscal splurge. The key areas where substantial increase in spending is likely are: Food subsidy courtesy Prime Minister Narendra Modi agreeing to the farmers’ demand for ‘legal guarantee for MSP’ and increase in procurement by state agencies besides hike in MSP, PM-Kisan due to expansion in the scope of the scheme to cover sharecroppers, launch of a national level scheme to provide cooked food to the poor in both the urban and rural areas at `10 a plate, and courtesy prodding by the Supreme Court
The Government has already sought to legitimize fiscal profligacy by drastically altering the trajectory of fiscal consolidation. Thus, in the budget for 2021-22, the FM had targeted FD of 4.5 percent during 2025-26 against a 2.5 percent threshold, the FRBM committee wanted to be achieved during 2022-23 and 3 percent (plus 0.5 percent for unanticipated events) during 2020-21 as per the amendment to FRBM Act made vide the Finance Bill 2018-19.
At the start of its first term, the Modi Government had set fiscal consolidation has a major objective of its economic policy. Thereafter, it was aiming at FD of 3 percent in 2018-19. Later, this goal was shifted to 2020-21. Yet, that year saw a deficit of 9.5 percent. Even as the current year is expected to end with FD of around 6.5 percent, the 3 percent target is nowhere in sight for the next five years.
For now, nobody knows as to when the Government will return to fiscal discipline. Even if it wants to, it will remain a distant dream unless it carries out long-pending expenditure reforms, especially major subsidies.
(The writer is a policy analyst. The views expressed are personal.)
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