The Centre’s fiscal deficit has been understated in the interim budget with the government keeping some of the debt serviced out of the Consolidated Fund of India (CFI) off-the-books.
This is unsound. Any accounting jugglery to show government finances in a better shape must be eschewed as it undermines the sanctity of the budget numbers. The need is to have greater transparency in accounting and disclosures to maintain the credibility of fiscal data reported by the government. Rightly, the Comptroller and Auditor General of India had underscored the need for proper disclosures, saying budgets understate fiscal deficits by misusing accounting loopholes.
It suggested that a policy framework for off-budget financing — used to cover deferred fertiliser bills, arrears of the Food Corporation of India, etc — should include disclosures to Parliament on the rationale for funding. This fiscal, central government debt, estimated at 48.9% of GDP, does not include so-called extra budgetary resources — liabilities raised by PSUs that are serviced from the CFI — of Rs 50,195 crore, that adds up to about 0.3% of the GDP.
The Medium-Term Fiscal Policy statement defended the exclusion saying that the amount actually raised would not be available till the end of the financial year. As a majority owner of PSUs, the Centre’s inability to estimate outstanding extra budgetary resources is puzzling. The government is also borrowing from the small savings corpus from the National Small Savings Fund at dearer rates, and increasing reliance on this source is not prudent.
It has missed the fiscal deficit marginally in the current fiscal. That is fine when investment activity is tepid as non-government savings can be tapped without creating excess demand that creates inflationary pressures.
However, a high fiscal deficit is not sustainable when investment activity picks up. It will fuel inflation. So, the focus must be on fiscal discipline. Plenty of income still escapes taxation. Rigorous mining of both the data generated by the goods and services tax and other unstructured data can plug that gap.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Rid Budget Math of Fuzzy Numbers