Loaned glory: Sharp rise in extra budgetary borrowings by PSUs raise the spectre of a debt trap

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Updated: February 04, 2019 6:52 AM

Centre has scaled up the funding of these non-revenue-generating  schemes through extra-budgetary resources (EBRs), all off-budget borrowings raised by its surrogates.

The fiscal deficit for FY19 is now pegged at 3.4% (against the original estimate of 3.3%), the deficit is targeted to be 3.4% for FY20 as well.

Caught between the twin goals of treading the fiscal consolidation path and keeping its various welfare programmes adequately financed, the Centre has scaled up the funding of these non-revenue-generating  schemes through extra-budgetary resources (EBRs), all off-budget borrowings raised by its surrogates. EBRs of this variety jumped from Rs77,350 crore in FY17 to a massive Rs2.24 lakh crore in FY18 and, as per the Interim Budget presented on February 1, to Rs2.74 lakh crore in FY19.

A large part (about three-fourths in FY19) of such off-balance sheet borrowing by the Centre is meant to fund the yawning gap between the budgetary allocations and the actual resource needs for the National Food Security Act (NFSA) over the years, but the funds raised also are used for various other schemes such as Swachh Bharat, rural electrification, affordable housing and higher-education infrastructure, etc.
Such EBRs — distinct from loans raised by assorted CPSEs and other government undertakings for their capex programmes most of which could be financed out of these entities’ receipts — have a virtual lien on the exchequer, but these are being kept out of the Budget and excluded from the fiscal deficit reported — the excuse being these are largely future, rather than current liabilities.

While the Comptroller and Auditor General of India (CAG) has questioned this practice, many independent agencies such as JPMorgan and Credit Suisse have also raised alarm over the resultant under-statement of the Centre’s fiscal deficit in reports released since the presentation of the Interim Budget.

Interestingly, the Interim Budget revised the EBRs via the Food Corporation of India (the agency responsible for NFSA) in FY19 to Rs1.96 lakh crore, up Rs1.24 lakh crore or 170% from the earlier estimate.

The FCI, which undertakes the food procurement, transportation and storage operations under NFSA, is projected to undertake EBRs to the tune of Rs1.78 lakh crore in FY20 as well, while an estimate of such non-capex/without-financial-returns borrowings by other government agencies for the year is not immediately available.

Besides FCI, other public-sector entities which are raising funds for the Centre’s programmes include Hudco, NHB, REC, PFC, Nabard, HEFA and NRIDA. “FCI — that should ordinarily be financed only from budgetary allocations — borrowed 1.3% of GDP from other sources in 2017-18, apart from what it received from the Budget. Similarly, in 2018-19, FCI borrowed 1% of GDP from other sources. This helps the Centre’s fiscal math, but the ‘effective deficit’ must include FCI borrowings, and therefore should be commensurately higher,” wrote  Sajjid Z Chinoy, chief India economist at JP Morgan.

In the demand for grants note for FY19, the government has pegged investment in FCI at Rs1.97 lakh crore, most of which is funded through EBR.

Earlier this year, the Centre arranged a fresh loan of Rs27,000 crore from the National Small Savings Fund (NSSF) for the FCI to service the principal dues of an earlier loan. This was the second instance of the FCI tapping into the NSSF to repay the principal component of an earlier loan. With states reducing their dependence for funds from NSSF, the Centre has upped its exposure to the small savings corpus. As on March 31, 2018, the outstanding debt of FCI (from NSSF) were at Rs1.21 lakh crore. The budgeted food subsidy through FCI for the current fiscal is Rs1.4 lakh crore (of the total food subsidy is Rs1.7 lakh crore).

Asked whether such increase in EBRs would impinge on the transparency of the Centre’s fiscal statements, economy affairs secretary SC Garg told FE on Saturday, “The government pays for whatever interest and losses FCI incurs (on account of the procurement operations). This becomes part of the Centre’s food subsidy bill. 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 which of is capital in nature, is disclosed by the government as its liabilities, though these are not part of the Centre’s fiscal deficit.”

The fiscal deficit for FY19 is now pegged at 3.4% (against the original estimate of 3.3%), the deficit is targeted to be 3.4% for FY20 as well.

If the debt being raised by the NHAI (Rs62,000 crore) and the ailing MTNL (Rs8,000 crore) are added (which too are mostly financed out of the Budget as the revenue streams of the entities are not enough to service the loans), the total size of such budget-anchored EBRs could go up Rs3.4 lakh crore in FY19. Including the railways and other PSUs, which can mostly fund their market borrowings, the EBRs by central agencies are estimated at Rs4.46 lakh crore in FY19 and could be Rs3.97 lakh crore in FY20.

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