Expenses on welfare schemes unmatched by increase in revenue

by February 25, 2019 0 comments

India's Minor CorruptionBudget allocation for welfare schemes does not match the increase in revenues, due to which Team Modi had to resort to a window dressing of accounts

In the interim Budget presented on February 1, the NDA Government reported a minor slippage of 0.1 per cent in fiscal deficit for 2018-19 against the target of 3.3 per cent of the GDP, whereas for 2019-20, the fiscal deficit is pegged at 3.4 percent. The Finance Ministry has indulged in skullduggery to restrict the deficit to 3.4 per cent, which itself is off the three per cent mark for 2018-19. With regard to proceeds from disinvestment of shares in Public Sector Undertakings , the Government had set a target of `80,000 crore for 2018-19. In the revised estimate, a look at the break-up shows (i) mop-up of `14,000 crore from sale of its 52.6 per cent share in Rural Electrification Corporation to Power Finance Corporation and (ii) `12,000 crore from buyback of shares by concerned PSUs, including Oil and Natural Gas Corporation (ONGC) and Coal India Limited.

During 2017-18 too, when it got a record of over `100,000 crore from disinvestment proceeds (against a target of `72,500 crore), over `30,000 crore was garnered from the sale of its majority stake of 51 per cent in Hindustan Petroleum Corporation Limited (HPCL) to ONGC. Further, it garnered `5,340 crore via buyback of its shares by PSUs (`19,000 crore during 2016-17). In principle, disinvestment involves selling of shares to the public so as to result in transfer of ownership from the Government to individuals or other private (albeit corporate) entities. However, in the case of share transfer from one PSU to another, ownership and control of shares remains with the Government. Similarly, buyback merely results in the destruction of shares. The use of these instruments erodes internal resources of PSUs, which has a debilitating effect on their ability to fund expansion, modernisation and growth. Imagine ONGC being compelled to borrow money to finance acquisition of Government’s stake in HPCL when its own projects are crying for funds.

The Government also resorted to extra-budgetary resources (EBR) to fund welfare schemes viz, the National Food Security Act (NFSA), Swachh Bharat, rural electrification and affordable housing. The EBRs to fund these schemes were as follows: `77,250 crore in 2016-17; `224,000 crore in 2017-18 and `274,000 crore in 2018-19. A major chunk was meant to fund the widening gap between budgetary allocation and the actual resource needs for NFSA. Under NFSA, the excess cost of procurement, handling and distribution over the selling price to the beneficiaries viz, `1/2/3 per kg for coarse cereals/wheat/rice, is reimbursed to the Food Corporation of India (FCI) as subsidy. During 2017-18/2018-19, FCI borrowed `211,000 crore/`196,000 crore on behalf of the Government. For 2019-20, this is budgeted at `178,000 crore.

On October 24, 2017, the Government had announced a `211,000 crore plan to recapitalise PSBs, whose capital was eroded due to high NPAs. This included `135,000 crore from ‘recapitalisation bonds’, `58,000 crore via public investment in PSB shares and `18,000 crore budgetary support. Borrowings through bonds could be even higher as PSBs are unable to meet their target (courtesy, lukewarm interest among buyers). For fertiliser subsidy — being the excess of cost of supply over low selling price reimbursed to manufacturers — the revised estimate for 2018-19 leaves a shortfall of about `45,000 crore. The Budget provision of `75,000 crore for 2019-20 does not provide for it either. Under no obligation to pay interest on delayed payments and extant accounting method of recording expenses when payment is made helps the Government persist with this unhealthy practice.  

Even with regard to petroleum subsidy, as against a Budget allocation of `25,000 crore during 2018-19, the estimated requirement is about `38,000 crore. This leads to a carry-forward of `13,000 crore to be paid to oil marketing companies in the public sector. Be it borrowings by the FCI et al for running non-revenue generating welfare schemes, or the issuance of bonds (to recapitalise PSBs) or delayed payments to fertiliser manufacturers and oil PSUs, these are ‘off-balance sheet’ items that do not get reflected in the Budget. These are liabilities of the Union Government, yet these are not captured in the fiscal deficit, which gets artificially suppressed. Likewise, the proceeds emanating from the sale of shares of one PSU to another as also share buyback by State undertakings (instead of selling to the public) seek to artificially lower the deficit. The reported deficit may give an impression that India’s macroeconomic fundamentals are sound but in reality, it may not be so. The crux of the issue lies in splurging expenses on welfare schemes (though Team Modi deserves credit for reining in leakages and ensuring that money reaches the beneficiaries in full) unmatched by corresponding increase in revenue. This prompts the Government to indulge in window dressing of accounts. The new Government will have to curtail expenses by undertaking reforms, especially in food, fertilisers, oil, PSBs and maintaining the tempo of higher tax revenues. A re-look at divestment strategy is also needed.

Courtesy: The Pioneer

Writer: Uttam Gupta

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