The Budget makers in Pranab Mukherjee?s team have shifted so many goal posts between now and the last fiscal year to arrive at the figures for 2011-12, the most charitable description for the changes is to call them innovation.
The aim of the whole exercise was to keep the borrowing plan of the government tied to a level that does not crowd out private investment. Lower borrowing by the government means an easier time for the private sector as it can borrow at lower rates of interest. So, the bond markets were pleased on Monday, when the finance minister set a Rs 3,43,000-crore borrowing target for 2011-12. What has got short shrift is the reliability of many of those numbers and, therefore, the signals for the rate of interest in the rest of the economy.
To achieve the lower scale of borrowing from the market in 2011-12, the finance ministry has instead shifted its actual borrowing plan under a larger umbrella. As the chart shows, in 2010-11, it had planned to borrow 90% of its fiscal deficit from the market, but in the new fiscal year that will be 83%.
Of the new sources the government budget managers have brought into play, the use of T-bills is an innovation that has been introduced this year. The impact of the dicey practice is already visible as it has hardened rates in the shorter end of the market. Going ahead, the larger borrowing will impact even more, while ostensibly keeping the overall market borrowing under a tight leash. In this fiscal, the government mostly used the 91-day T-bills to finance its Rs 10,000 crore of short-term borrowing and next year it will use the longer 364-day T-bills to give a longer time to roll over. The use of short-term papers to finance long-term asset build up is an obvious no-no for any debt plan, the obvious hardening of rates.
But leaving even this aside, the more questionable practice is the impact of the large cash balances in the government system, in a year when the economy was desperately short of liquidity. RBI had to twice resort to open market operations to ease shortage of liquidity in the financial system and keep interest rates down. It is no secret that in the second supplementary demand for grants this year, the government sanctioned itself an enormous Rs 19,812 crore (first supplementary Rs 54,588.63 crore) through Parliament. The sum has obviously not been spent and, as the statement under FRBM laid with the Budget papers in Parliament says, will be used to smoothen the expenditure requirements in early next year. So, the damage to the interest rates from the cash balance is quite evident.
The other innovation introduced by the ministry is the strange practice of sequestering a ways and means advance of a massive Rs 10,000 crore to Food Corporation of India (FCI) for 2011-12. Put in simple language, it means the sum does not show up in the food subsidy bill of about Rs 60,000 crore of the government in the fiscal, as it is repaid in the course of the year. But as it is a borrowing from RBI, the government does pay an interest cost on it.
The basic idea of a transparent borrowing mechanism is to provide a clear signal to the market and, therefore to the economy, of how government finances are being managed. The introduction of lemmas like the FCI ways and means advance only serves to hide the enormous scale of the food subsidy and the need to cut it down.
Incidentally, the government has also estimated, as part of its capital receipts, a Rs 6,000-crore rise in recovery of loans from states and public sector units to Rs 15,020 crore, again for 2011-12. The higher estimated receipt is supposed to be primarily on account of recovery of short-term loans given to FCI for its procurement operations. The statement on the FRBM Act has justified the practice of providing such working capital loan ?at market linked rates? as an assistance to FCI that has ?helped in reducing (its) reliance on high cost funds?. Justifying it as having reduced its interest cost for providing food security, the statement says ?this practice will be continued in the coming years?.
Since public sector banks in any case have to give directed food credit to FCI at cheaper rates, the government measure has opened up a competition with them that does not get reflected in the market borrowing programme and, to that extent, under-reports the Centre?s drag on the sector.
The final piece of the peculiar system of expenditure management tried on by the government, of late, has to be that of petroleum subsidy. Even before the Nandan Nilekani-led panel has given its preliminary report, the FRBM statement explains that the ?government has firmly established the practice of providing petroleum and fertiliser subsidy in cash?.
For fiscal 2011-12, the government has clearly said it expects the current international prices of crude and other commodities to continue at the current levels. As a result, the total cash subsidy the government will provide to oil companies for the year will be Rs 20,000 crore only, the remaining Rs 3,640 crore going towards related heads.
And we are not even talking about the quite arbitrary division of revenue expenditure into a capital component. It is like a doctor taking upon himself the decision of whether a new born is a boy or girl. The finance controllers can decide the percentage for the year and then work backwards across the numbers?quite elegant.
subhomoy.bhattacharjee@expressindia.com
