PSUs are free to borrow, but if the borrowing is based on a sovereign guarantee, it has to be part of the govt debt
In all the din about the deficit, economist Sajjid Chinoy has drawn attention to the elephant in the room. This is the sharp unhealthy spike in the government’s off-budgetary borrowings over the past few years. Unable to borrow beyond a point for fear of sending the yield soaring and unwilling to cut back on expenditure at a time when the private sector has been strapped for cash, the government has funded growth by enabling public sector units to borrow and guaranteeing their borrowings. Chinoy estimates the government’s total deficit has climbed to an uncomfortably high level of 8.5% of GDP for 2018-19 and that is excluding the borrowings by the state PSUs.
To be sure, PSUs are entitled to borrow to run their businesses and it is no one’s case that they shouldn’t leverage their balance sheets. However, if the government is providing either an explicit or implicit guarantee, it cannot afford to leave the borrowings uncovered. That is simply not prudent. It is, therefore, somewhat surprising that Subhash Garg, the DEA secretary, believes the level of NHAI’s borrowings don’t matter because it is a sovereign surrogate and not borrowing on the strength of its own balance sheet. That may be so but, since the government is indeed guaranteeing NHAI’s borrowings—else it could not have offered retail bonds at the rate that it does—there needs to be a provision in the budget. Merely disclosing the liabilities is not good enough and it is imprudent to think that these liabilities are not part of the fiscal deficit but the government’s debt. The fact is it is the government—and the taxpayer—which will need to make good these borrowings in the event of a default by the PSU. NHAI’s borrowings rose a sharp 66% to Rs 75,384 crore at the end of March 2017 and are estimated to have risen further to Rs 1.2 lakh crore in March 2018. Its finances are in a shambles given the combined loss in 2015-16 and 2016-17 was close to Rs 500 crore. Moreover, the business is in a mess because the net cash generated from operating activities in the two years to 2016-17 was a negative Rs 3,774 crore.
Indeed, the Comptroller and Auditor General (CAG) has pointed out that NHAI has not maintained proper books of accounts and other relevant records. It has pointed out that the fixed assets are overstated by Rs 2.17 lakh crore since the assets are held on behalf of the government. Also, the CAG has noted that including borrowing costs of Rs 4,068 crore for 2016-17 on completed projects is in contravention of generally accepted accounting practices. So it is not as though all PSUs are in fine fettle with modest debt-equity ratios as the DEA secretary Garg makes it out to be; many of them don’t have the scope to borrow but are rated AAA simply because they are backed by the sovereign. There is no harm in the government providing a guarantee but it should build in these liabilities into its accounts. Downplaying off-budget borrowings such as those by Food Corporation of India (FCI), which borrowed 1.3% of GDP in 2017-18 and 1% of GDP in 2018-19, does not make for good public finances. Interestingly, the interim budget revised the EBRs via the FCI in FY19 to Rs 1.96 lakh crore, 170% higher than the budget estimate. The total off-budgetary borrowings, according to the interim budget, stood at Rs 2.74 lakh crore for 2018-19.