How do you fund major infrastructure projects worth crores without the numbers showing up in your account books? Simple, use the “off -balance sheet funding route” to raise finances for projects since these borrowings will never reflect in your profit and loss account, and you will remain as debt-free as you want.
Call it what you may, creative accounting, financial jugglery etc, but it is one strategy that has been used by various governments to shore up their account books.
The current Bharatiya Janata Party (BJP)-led National Democratic Alliance has virtually perfected the art in the past five years, drawing criticism from economists, brokerage firms and even the Comptroller and Auditor General (CAG) of India, a government accounting body.
"Resorting to off-budget financing for revenues and capital spending seems to be an easy way out because while such financial jugglery have fiscal implications they do not form part of the calculation of fiscal indicators like fiscal deficit," says a recent CAG report
In its Fiscal Responsibility and Budget Management Compliance report for 2016-17, the CAG has categorically stated that since these borrowings do not find a mention in the Finance Accounts or as part of government guarantees it “reflects lack of disclosure and it also puts major sources of funding of government’s crucial infrastructure projects beyond the control of Parliament.” Such substantial borrowings for capital expenditure may require concrete policy for sustainability of debt and adequate disclosure, the report adds.
The off-balance budget strategy is simple. Ask the public sector financial intermediaries like Indian Railway Financing Corporation (IRFC) or the Power Finance Corporation (PFC) to borrow money from the market under internal and extra budgetary resources (IEBR) and fund major railway and power infrastructure project to supplement the government’s efforts. Once these companies raise the necessary amount, these get reflected as liabilities on their balance sheets and not on the central government’s Budget documents. The government promises to pay the interest on these funds, which is a far lesser amount, keeping the fiscal deficit in check.
For instance in FY17, the government approved an additional mobilisation of ₹31,300 crore to augment infrastructure development through the IEBR route. These funds would be raised by PFC, Indian Renewable Energy Development Agency (IREDA), Inland Waterways Authority of India (IWAI), and National Bank for Agriculture and Rural Development (NABARD), while the government would chip in with just₹16,000 crore.
Such off-balance sheet funding on food fertiliser and irrigation amounted to 0.7% of the GDP over FY13 to FY17, though the amount started rising from FY16, says the report. “The annual off-balance sheet food subsidy in these years ranged from 42% to 104% as reflected in the Union Budget,” the report adds. And, it was the Food Corporation of India (FCI) that bore the brunt, raising finances through issuance of bonds, loans from National Small Saving Fund (NSSF) and seeking Cash Credit Facility, which is guaranteed by the government.
Likewise, off-budget subsidies on fertilisers between FY13 and FY17 rose from 37% to 56%. The task of mobilising funds fell on government-owned fertiliser companies. The Department of Fertilisers made special banking arrangement with public sector banks to ensure loans to selected fertiliser companies. The government paid a certain rate of interest on these loans with the excess being taken care of by the company.
Moreover, between FY16 and FY19, 60% of the total capital spending of the central government was done via below-the-line sources and amounted to 2.5% of the GDP. Such off-balance sheet funding, argues a recent report by brokerage firm Ambit Capital, highlights “the deterioration in the quality of accounting used for calculating the fiscal deficit of the Union government and could cause India’s lofty valuations to be questioned further.”
The brokerage firm also adds that while data regarding the off-balance sheet financing of the central government between FY18 and FY19 is still not available, a continuation of the past trends would imply that the Centre’s true fiscal deficit is likely to be 4.2 % of GDP in FY 19 instead of 3.3% as projected. Hence, there has been no fiscal consolidation in FY19 as compared to FY18, although real GDP growth accelerated by 50bps, according to the Central Statistics Office (CSO).
In fact, a recent report --“Budget Preview: Fiscal Spur for Growth?" by think tank Economic Spotlight, pegs the total IEBR at ₹4,78,300 crore (₹4783 billion) in FY19 of which ₹72,000 crore alone would go to the Food Corporation of India (FCI) for procurement purposes. Such off-balance sheet sources, says the report, has been used to mask large revenue expenditure in the last two years like the ₹72,000 crore (₹720 billion) earmarked for FCI. “While such spending by the central PSUs doesn’t affect the total borrowing of the central government, it does have an impact on the bond market. Higher borrowings by CPSEs (Central Public Sector Enterprises) would just as well lead to rising borrowing costs in the economy," adds the report.
Moreover, in order to keep bond yields in check (read keep down interest rates) and increase liquidity in the market, the NDA government has also resorted to borrowing more from the National Small Savings Fund (NSSF) rather than tapping the market, especially in the past two years. The government has been helped in its effort from 2014-15 onwards, because of demonetisation and partly due to the underperformance of other saving assets like gold. This has led to greater tax saving by the common masses. No wonder, it has budgeted ₹750 crore from NSSF in FY 19, while already raising₹1020 crore in FY 18.
So don’t be surprised if the country's fiscal deficit stays below 3.5% of the GDP in FY 19 when the interim budget is announced on February 1, 2019.