Managing subsidies is a critical aspect of fiscal management. When we say managing we really mean managing, not playing with figures as the union finance ministry is doing year after year.

The quantification of subsidies that do not find their way into the budget documents is thus very important to management of government's finances. Ironically, there is an aspect of fiscal management that is not even seen as one. This is the surrender of large sums at the end of every fiscal year, duly reported by CAG.

Fiscal management would be done better with the CAG doing a concurrent audit of the surrender rather than waiting for a year to elapse as the practice now. But, the problem is that the audit report on surrender is not seen to have any implication for the quality of fiscal management. Few of the economists specialising on matters of fiscal policy care to go through the reports of CAG.

Does the IMF for instance know that there is a phenomenon in fiscal mis-management known as surrender? A study prepared for the December, 1995 meeting in New Delhi of the World Economic Forum had indicted the Indian government for its fiscal failures but do the economists who prepared the document know that year after year the government reports large sum of money as the unutilised portion of the budget?

Fiscal policy is only as good or bad as it is implemented. If year after year the government decides that a large portion of the projected expenditure should not fructify, it does not make for good fiscal policy. If we add this up to the food and fertiliser subsidy that is given in the budget documents, we will get a massive figure.

In this regard, one must recall the tentative bid made during 1986-87 when V P Singh was the union finance minister to introduce zero-base budgeting. The idea was to review projects that were not taking off and to scrap them. But, this never took off. The obvious reason was that nobody in the government wanted to dismantle the regime of allocations being made indiscriminately. It is to be regretted that surrender of large funds as a matter of course by end of the fiscal year does not even get requisite notice in discussions and academic exercises on fiscal management. It must be deplorable indeed if the specialists on fiscal issues accept the declared non-utilisation of substantial resources as a necessary step towards fiscal restraint.

Those outside the CAG's office will never know what funds are given up in this fashion, though awareness of surrender will naturally provoke the suspicion that these are not against revenue expenditure and only postponement of capital outlay contributes to surrender. Yet, no government should make populism the thrust of fiscal policy. Unfortunately, this is explicit in the very fact of surrender of funds on the last day of every fiscal year. One might say that this is preferable to indiscriminate departmental spending in the closing days of a year, when all manner of purchases are usually made, but surely not when critical capital investment is sacrificed. It is a different issue that not all departments can do this but most can and often do. Appropriations of different departments are done independently but surrender cannot come like a bolt from the blue.Surrender, given its implications for the quality of fiscal management, is graver than bad planning. Agreed that on the face of it this reflects the inability of departments to spend what has been allocated and such inability can be so routine that it is not confined to one year, still an yearly surrender of large amounts as a matter of course cannot be dismissed as an act of bad planning. Bad planning is bad by itself, but worse when surrenders are a massive regularity, as regular and as meticulous as the budget itself. The subsidy element in this is represented by the fact that had there been no surrender of the magnitude that CAG reports reveal the unreported subsidy would be more. The pretension of fiscal prudence implicit in large scale surrender merely shows down the subsidy. This view can, of course, be countered by the argument that had the full allocation been spent, the subsidy payments would have been greater. Yes, the reported figure would be higher but as for the unreported subsidy this would be larger too because of the not so mechanical act of surrender. This arises from the time and cost over-run of projects postponed because of large reported non-utilisation of funds year after year. When capital investment costs shoot up because of a combination of bad planning and a penny wise pound foolish fiscal policy of showing down the fiscal deficit through arithmetical jugglery, the hidden or unreported subsidy becomes greater. There is room for suspicion that the reported surrender is different from reality and it can well be that in reporting a particular surrender the department concerned is only trying to shift audit attention away from a more serious act of fiscal aberration. This arises from the entries in CAG reports, which seem trivial. Worries about subsidy are encouraged by real surrenders possibly taking place in critical heads of expenditure and not in what are reported.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.