Public Sector Undertakings under-leveraged, have huge capacity to borrow, says economic affairs secretary Subhash Chandra Garg

Published: February 3, 2019 5:43:18 AM

Subhash Chandra Garg asserted that there hasn’t been any ‘unjustified borrowing’ by the public sector.

Economic Affairs Secretary Subhash Chandra Garg

The NDA government has made efficient use of extra-budgetary resources (EBR) raised by public-sector entities to not only boost public capex, but also fund some state-run programmes. While this has softened the blow of sluggish private investments, questions have been raised of such off-budget liabilities understating the fiscal deficit, as many of these government entities do need to invoke the sovereign guarantee to repay the borrowed funds. In a post-interim Budget interview with Banikinkar Pattanayak and KG Narendranath, economic affairs secretary Subhash Chandra Garg asserted that there hasn’t been any ‘unjustified borrowing’ by the public sector. While the government reimburses the FCI from the Budget for any losses incurred by it for procurement operations and the interest paid by it on loans to fund the grain purchases, it shows the liability of NHAI’s annuity-based projects as its own (“Some Rs45,000-crore annuity projects liabilities are disclosed as government liabilities,” Garg says). The secretary added that the Budget has factored in RBI surplus of Rs68,000 crore for the current fiscal; even for the next year, while the central bank’s economic capital framework is being reviewed by a committee, its reserves aren’t budgeted for, but only the likely surplus. Edited excerpts:

Given that the projected pace of expenditure is slower in FY20 than FY19 despite the launch of schemes like PM-Kisan, is there a risk that actual spending will overshoot the target? The UPA used to compress expenditure, while the current government has largely stuck to the budgeted pace of spending.

We have budgeted for a 13.3% rise in expenditure for the next fiscal. Given the expected inflation of, say 3.5%, the real growth in spending is about 10%, which is very healthy. Some amount of reallocation of expenditure always takes place later but funds for all important programmes for the next fiscal have been provided. For MGNREGA, for instance, against the Rs55,000 crore budgeted for the current fiscal, the government has provided Rs61,084 crore (revised estimate). The allocation for the next fiscal stands at Rs60,000 crore, which marks an increase from the BE of FY19.

The previous government had to resort to spending cuts because the fiscal deficit in the beginning of their tenure was very high (6.2% in 2009-10). So to bring the deficit down to, say 4%, required heavy adjustment and warranted massive expenditure compression. The real expenditure growth during the entire five-year tenure of the previous government (UPA-II) was only about 2%.

The off-budget borrowing by the PSUs has seen a spike in recent years. Many entities like NHAI that borrow heavily, are not in a position to fend for themselves and the liability will finally fall on the government. The FCI also seems getting into a debt trap. Had these all been accounted for in the Budget, the fiscal deficit would have been much higher.

Let’s be clear about it. PSUs and authorities like NHAI have always been borrowing for their capex programmes. If they can afford, they should do it.

They are not borrowing more than their capacity, as the debt-to-equity ratio of most PSUs across sectors would be just about 1:1 (in many cases even lower than this). So most of them are, in fact, under-leveraged. Authorities like NHAI follow large capex programmes and they have sovereign backing. As for the Food Corporation of India (FCI), the agency borrows during the course of the year for its working capital requirement. Whatever interest and losses FCI incurs (on account of the procurement operations), the government pays for it. This becomes part of the centre’s food subsidy bill — which is budgeted at Rs1.84 lakh crore for the next fiscal (against Rs1.71 lakh crore in FY19). So the government doesn’t borrow (for itself) through the FCI. And there is no unjustified borrowing by the public sector. Some amount of off-budget borrowing, almost all of the capital nature, are disclosed by us in our liabilities (the recap bonds for state-owned banks, for instance) although these are not part of the Centre’s fiscal deficit. So we are disclosing everything and there is no abnormal increase in these. Earlier, there were oil and fertiliser bonds etc, which used to be of the real off-budget types. None of those borrowings has been resorted to by the current government. All that is being done is either the PSUs or authorities like the NHAI or the railways are funding their capex programmes; or some amount for rural sector programmes like the construction of toilets or houses is done by the PSUs and guaranteed by the government and we disclose them.

Does NHAI have the kind of balance sheet to borrow that much?
NHAI’s balance sheet doesn’t matter; it’s not a company that is borrowing on the strength of its balance sheet. It is a sovereign surrogate, so all its borrowing is guaranteed by the government for a capex programme that the Centre needs.

If the cost goes up and NHAI is unable to pay up, it will finally fall on the government…
Yes and the government will pay for it.

So shouldn’t this cost for NHAI be part of the Budget?
There is no need. Incidentally, the programmes they (NHAI) undertake on an annuity-basis, they are disclosed in our Budget papers. I think some Rs45,000-crore annuity projects liabilities of theirs are disclosed by us as our liabilities. Since these are future liabilities, they are not part of the fiscal deficit but debt. So there is a statement in the expenditure profile, which reveals the entire annuity liabilities as well, reflecting the transparency in the budget exercise.

PSUs’ cash surplus has reduced (because of hefty dividend payouts/buybacks) and private investment has still not recovered meaningfully. The government has now budgeted for a lower expansion in capex. Won’t it affect growth?
The capex cycle in the private sector has started picking up. Credit growth is reasonably higher than a year before. The capex by PSUs is not getting reduced at all. In fact, the budgeted IEBR of FY20 is higher than BE of FY19.

As for the government getting high dividends from PSUs, these entities do a careful analysis of their financial situation and the likely dividend they will have to pay. After discussing with their management, whatever amount is reasonable is declared as dividend to the government. For instance, the oil companies typically announce 52-53% of their surplus as dividend. The rest is capex. As I have said, most of the PSUs have tremendous capacity to borrow more for capex. All these are very much in line with the policy of sound management while ensuring that enough capex takes place.

There is a dip in private consumption growth.
The growth in private consumption growth this year has been slightly sluggish, having witnessed good expansion in the previous 2-3 years. It will do well going forward as the rural economy is picking up with the direct benefit transfers etc.

You have not factored in a sharp increase in RBI dividend…
We have not budgeted anything from their reserves but whatever is their surplus, it will be transferred to the government, as per the rules decided by its board. So let us wait for the RBI board meeting to decide on it. This year, we have budgeted Rs 68,000 crore as the RBI’s dividend.

Is the projected growth in tax revenue ambitious?
In FY18, the growth in tax collection was over 20%. We will maintain this pace in the current fiscal and we have projected a 14.9% rise for FY20, which is below the trend and shows the realistic nature of the estimates.

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