Fiscal transparency jacks up ‘expenditure’ numbers in the Union Budget 2021-22

Fiscal transparency jacks up ‘expenditure’ numbers in the Union Budget 2021-22

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published Published on Feb 4, 2021   modified Modified on Feb 5, 2021


In order to understand why the Union Budget 2021-22 is being termed as ‘transparent’, it has to be read simultaneously with the 15th Finance Commission Main Report for 2021-26. But first, let us discuss about 'fertilizer subsidy'.

The budget documents for Union Budget 2021-22 show that the spending on ‘fertilizer subsidy’ was slashed from Rs. 1,33,947 crore in 2020-21 (revised estimate) to Rs. 79,530 crore in 2021-22 (budget estimate). However, the budgetary allocation on ‘fertilizer subsidy’ was Rs. 71,309 crore in 2020-21 (B.E.), which is almost half of the revised estimate figure for 2020-21. The large difference between B.E. and R.E. figures for expenditure on 'fertilizer subsidy' in 2020-21 occurred on account of change in the accounting practice [as recommended by the Comptroller and Auditor General (CAG) of India and the 15th Finance Commission, among others], and moving away from the 'off-budget financing' mode to a more transparent way of depicting expenditure under that head.

It needs to be mentioned here that the Union Government resorted to Special Banking Arrangement (SBA) in order to meet the liquidity requirements of fertilizer companies arising out of the 'fertilizer subsidy', which is announced in every year's Union Budget. The main report of the 15th Finance Commission for 2021-26, which was presented in the Parliament on 1st February, 2021, explains that the SBA is short-term credit from public sector banks to meet the mismatch in budget allocations and actual amount due at the end of the financial year. The Union Government pays interest to banks at the G-Sec rate and the interest above the G-sec rate is borne by the fertilizer companies. The stock of extra-budgetary resources pertaining to fertilizer subsidies as of March 2020 was nearly Rs. 40,000 crore.

Now, let us turn our attention to discuss ‘food subsidy’. Budget documents released for 2021-22 indicate that the spending on ‘food subsidy’ was trimmed from Rs. 4,22,618 crore in 2020-21 (R.E.) down to Rs. 2,42,836 crore in 2021-22 (B.E.). The budgetary allocation on ‘food subsidy’ was Rs. 1,15,570 crore in 2020-21 (B.E.), which is almost a quarter of the revised estimate figure for 2020-21. The huge difference between B.E. and R.E. figures for expenditure on 'food subsidy' in 2020-21 too happened due to the change in accounting practice, and switching from the 'extra-budgetary borrowing' mode to a more transparent way of revealing expenditure under that head.

The 15th Finance Commission report for 2021-26 mentions that the Food Corporation of India (FCI) relies on a number of instruments such as bonds, unsecured short-term loans and National Small Savings Fund (NSSF) loans from the Union Government in order to cover the deficit in the budgetary allocation for ‘food subsidy’. It should be noted here that the outstanding stock of NSSF loans to FCI as of March 2020 was about Rs. 3.2 lakh crore.

Therefore, much of the difference between B.E. (i.e. Rs. 30,42,230 crore) and R.E. (i.e. Rs. 34,50,305 crore) figures (i.e. by nearly Rs. 4,08,075 crore) pertaining to total Government expenditure in 2020-21 has been observed due to the Union Government taking recourse to a more transparent way of financing its schemes/ programmes and reporting its fiscal deficit instead of relying on 'off-budget financing'.

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Recommendations by the 15th Finance Commission report for 2021-26

Table-1 shows that the proportion of Union Government's extra-budgetary resources in India's gross domestic product (GDP) has increased from 0.1 percent to 0.8 percent between 2016-17 and 2020-21 (B.E.). The main report of the 15th Finance Commission for 2021-26 says that the Union Government has been resorting to off-budget financing (the details of which have been discussed earlier) in the form of deferment of expenditure to the following year, aside from the reported EBR. The Union Government started including details of extra-budgetary resources in its Medium-term Fiscal Policy Statement from 2019-20 in order to restore the integrity of fiscal accounts.

Table 1: Outstanding Liabilities of the Union Government (percent of GDP)

Source: Fifteenth Finance Commission Volume-I Main Report, Report for 2021-26, October 2020, presented to the Parliament on 1st February, 2021, please click here to access
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Earlier the CAG of India in its Report no. 20 of 2018 on compliance with the Fiscal Responsibility and Budget Management Act by the Union Government had stated about the malpractice of off-budget financing by the Union Government. Full budgetary provision in the year of incurring expenditures needs to be made for eliminating the practice of short-term borrowings to finance fertilizer subsidies and lending to FCI through NSSF, recommends the recently released Finance Commission report. It suggests that the expenditures arising out of current transactions needs to be separated from the accumulated liabilities of extra-budgetary transactions. Additional resources needs to be mobilised by the Union Government through administrative and governance reforms so that scarce resources are released for clearing outstanding liabilities. In case of both ‘food subsidy’ and ‘fertilizer subsidy’, it has been suggested that the Union Government should carry out pricing and administrative/ governance reforms for eliminating dependence on extra-budgetary resources in a time-bound manner. Deficit and debt needs to be reported transparently as is required as per the amended Fiscal Responsibility and Budget Management Act of 2018.

The newly released 15th Finance Commission report advises the Union Government to draw up an appropriate plan for introducing such measures that will ensure repayments of outstanding extra-budgetary liabilities in a time-bound manner. Building on the definition of ‘Central Government Debt’ in the amended FRBM Act, the latest available report of the 15th Finance Commission for 2021-26 mentions that the Union and State accounts should include debts of all government entities and agencies/ corporations that deliver public services on behalf of the Union or State Governments, including all autonomous bodies, parastatals, and extra-budgetary funds at the Union and state-levels.

International experience shows that the realisation of risks originating from ineffective surveillance at all levels of government, especially from sub-national governments and extra-budgetary borrowing of the ‘public sector’ have triggered financial crises time and again, states the 15th Finance Commission main report for 2021-26.

What does the Union Budget say about EBRs and loans from NSSF?

The budget speech of the Minister of Finance reveals that apart from providing the figures related to borrowings of the Union Government agencies that went towards funding Government of India's schemes/ programmes, and whose repayment burden was on the Government, the loans provided by the Government to FCI has also been disclosed in the latest budget.

Table 2 (a): Statement of Extra-Budgetary Resources (EBRs) (Govt. fully serviced bonds, NSSF loan and other resources)

Source: Union Budget 2021-22 Speech dated 1st February, 2021, please click here to access
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Clearly, the Statement of Extra-Budgetary Resources (i.e. table-2a) indicates that the EBRs mobilised through issuance of Government fully serviced bonds were Rs. 9,167.00 crore in 2016-17, Rs. 15,095.00 crore in 2017-18, Rs. 65,602.10 crore in 2018-19, Rs. 22,006.30 crore in 2019-20, Rs. 31,459.29 crore in 2020-21 (R.E.) and nil in 2021-22 (B.E.).

Table 2 (b): Financial support extended through loans from NSSF (in Rs. crore)

Source: Union Budget 2021-22 Speech dated 1st February, 2021, please click here to access
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Table-2b shows that the financial support extended through loans from NSSF was Rs. 70,000.00 crore in 2016-17, Rs. 73,000.00 crore in 2017-18, Rs. 97,000.00 crore in 2018-19, Rs. 1,26,310.00 in 2019-20, Rs. 94,636.00 crore in 2020-21 (R.E.) and Rs. 30,000.00 crore in 2021-22 (B.E.). The grand total support through both EBRs and loans from NSSF was Rs. 79,167.00 crore in 2016-17, Rs. 88,095.00 crore in 2017-18, Rs. 1,62,602.10 crore in 2018-19, Rs. 1,48,316.13 crore in 2019-20, Rs. 1,26,095.29 crore in 2020-21 (R.E.) and Rs. 30,000.00 crore in 2021-22 (B.E.).

References

Fifteenth Finance Commission Volume-I Main Report, Report for 2021-26, October 2020, presented to the Parliament on 1st February, 2021, please click here to access

All reports of Fifteenth Finance Commission for 2021-26, please click here to access

Notes on Demands for Grants, 2021-2022, Department of Food and Public Distribution, please click here to read more

Union Budget 2021-22 Speech dated 1st February, 2021, please click here to access

Video: Presentation of the Union Budget by Finance Minister Nirmala Sitharaman 2021-2022, Doordarshan National, please click here to access (accessed on 4 February, 2021)

Image Courtesy: Doordarshan National YouTube Channel, please click here to access

 



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