MARCH 29, 2017

By Naresh Minocha, Consulting Editor

INTERNATIONAL Monetary Fund's (IMF's) two recent country reports on India have made certain crucial observations on fiscal discipline and debt sustainability. These should lead to a serious Parliamentary debate.

Members of Parliament (MPs) ought to pitch for fiscal transparency, which successive regimes have resisted, spurning well-meaning advice from different quarters. Fiscal transparency has now touched a new low under NDA Government. This charge would get amply substantiated by facts later in this column.

Fiscal opacity, which minimizes accountability, can leave future generations indebted for cash splurged by populism and opportunism-driven politics.

A clear-cut inference from IMF's Staff Report (SR) is that it does not accept Government's computation of fiscal deficit. Says SR: "The FY2016/17 Budget targets a fiscal deficit of 3.5 percent of GDP (equivalent to about 3.8 percent of GDP in IMF terms)".

It has reiterated this observation elsewhere in the report. Neither Government nor IMF has explained to the public why & how this 0.3% difference in GDP has arisen.

Have they factored in all off-budget transactions in fiscal deficit? Have they given consideration to Government's normal practice of rolling over certain due payments such as subsidies to the next budget? Why should total accumulated deficit of Rs 90,707.56 crore as on 31 st March 2015 under National Small Savings Fund (NSSF) not be reflected in fiscal deficit?

Such issues are likely to figure in IMF's Fiscal Transparency Evaluation (FTEs) study on India as and when it is taken up in the near future. IMF has so far conducted 18 FTEs on different countries under its latest transparency initiative.

IMF's second report on 'India - Selected Issues' observes that "India's public debt-to-GDP level is relatively high compared to other countries...". It says that the majority of countries target a public debt-to-GDP ratio of 60 percent.

SR has noted that "public debt as a share of GDP is projected to remain at almost 70 percent by end-FY2016/17, and will decline gradually over the medium term, remaining above India's debt tolerance range (60–65 percent of GDP) for several years."

As for doubts about the real size of Union Government's fiscal deficit, the Government should explain why it has not made public its decision to utilize certain public sector non-banking finance companies (NBFCs) and National Bank for Agriculture and Rural Development (NABARD) as instruments for raising additional debt aggregating to Rs 31,300 crore in 2016-17.

These extra budgetary resources (EBRs) are being raised via new securities named 'GOI fully serviced bonds' (GFSBs). Have they been reckoned in the computation of fiscal deficit by both Government and IMF?

One can only surmise about this decision by piecing together information scattered in prospectus/information memorandum of GFSBs-issuing entities.

Of Rs 31,300 crore being raised through GFSBs in 2016-17, Rs 16300 crore would be serviced by the Government. For this, Finance Ministry will make suitable budget provisions in the respective ministries budget documents for repayment of principal and the interest payments as and when the need arises.

The Government did not put these facts in public domain, thereby leaving public with an innocuous impression about infrastructure funding articulated by Finance Minister Arun Jaitley in his budget speech for 2016-17.

He had stated: "To augment infrastructure spending further, Government will permit mobilisation of additional finances to the extent of Rs 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority (IWAI) through raising of bonds during 2016-17".

This 'permit' has turned out to be a government directive. Compare Mr. Jaitley's statement with the disclosures made by public enterprises that have offered GFSBs to investors.

For instance, IWAI, in its disclosure dated 1 March 2017 for investors, says that GFSBs are being offered "as per Office Memorandum No. F.15(4)-B(CDN)/2015 dated October 03, 2016, Office Memorandum No. F.15(4)-B(CDN)/2015 dated October 20, 2016 and Office Memorandum No.15(4)-B-(CDN)/2016 dated January 03, 2017" issued by Finance Ministry.

It adds: "The proceeds of the Bonds issueed shall be utilized to meet Government of India's requirement for the purpose of development of infrastructure on National Waterways. Service obligation of the bond (periodical interest payment and principal redemption maturity) will be paid by Government of India through IWAI. All other expenditure like issue expenses / transaction charges shall be reimbursed by Government of India".

IREDA, in its offer to investors dated 3rd March 2017 has made a similar disclosure. It says " MNRE (Ministry of New and Renewable Energy) shall provide directions to IREDA for the utilization of funds raised through these Bonds and spend only on the directions of the MNRE…".

The issue of GFSBs does not require a special government guarantee. In one of its office memos, Finance Ministry has described this EBRs initiative as one-time arrangement for market borrowings in 2016-17 only.

This arrangement is similar to the arrangement for fertilizer and oil/petroleum subsidy bonds that were not considered for computation of fiscal deficit for years till 2008-09.

Presenting the budget for 2008-09, the then Finance Minister P. Chidambaram stated: "I acknowledge that significant liabilities of the Government on account of oil, food and fertilizer bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent. There is a need to bring these liabilities into our fiscal accounting. As a first step, I have shown these liabilities clearly in "Budget at a Glance' ".

Later, Thirteenth Finance Commission (TFC) observed: "In recent years, off-budget liabilities of the Centre have assumed alarming proportions. In 2008-09, off-budget bonds issued to oil marketing and fertiliser companies amounted to Rs. 95,942 crore or 1.80 per cent of GDP."

In its report submitted in February 2010, TFC recommended: "There should be no off-budget financing of such subsidy in future years.

The UPA government, however, contrived a special banking arrangement (SBA) for payment of outstanding fertilizer subsidy of Rs 5000 crore to get around TFC's recommendation in 2012-13.

UPA enhanced its reliance on SBA in 2013-14 by facilitating payment of outstanding fertilizer subsidy of Rs. 13961.08 crore. SBA involves issue of comfort letter by Government to banks to enable them lend this money as short-term loans against overdue subsidy receivables. Later, the Government deposits receivables directly into special accounts of lending banks. The interest on these short-term loans is shared by the Government and the fertilizer companies.

NDA Government has retained SBA for management of subsidy and fiscal deficit.

Mr. Jaitley, in his budget speech for 2017-18, disclosed that the Ministry-appointed committee for review of Fiscal Responsibility and Budget Management (FRBM) Act has recommended that "a sustainable debt path must be the principal macro-economic anchor of our fiscal policy".

He continued: "The Committee has favoured Debt to GDP of 60% for the General Government by 2023, consisting of 40% for Central Government and 20% for State Government".

Mr. Jaitley added: "The Committee has also provided for 'Escape Clauses', for deviations up to 0.5% of GDP, from the stipulated fiscal deficit target. Among the triggers for taking recourse to these Escape Clauses, the Committee has included "far-reaching structural reforms in the economy with unanticipated fiscal implications" as one of the factors. Although there is a strong case now to invoke this Escape Clause, I am refraining from doing so. The Report of the Committee will be carefully examined and appropriate decisions taken in due course."

Mr. Jaitley did not indicate when and whether he would make public report of this committee.

Though almost two years have lapsed, his Ministry has also not made public the reports of Expenditure Management Commission (EMC). Expenditure management is as important as revenue generation in the management of fiscal deficit/surplus.

The Finance Ministry has also not made public UPA-commissioned studies on black money, which can also prove handy in fiscal reforms. Nor has it made public full reports of special investigation team (SIT) on black money.

It is here pertinent to drive home the necessity and virtues of transparency as seen by the World Bank. A World Bank document captioned 'Module 7: Fiscal Transparency', says: " Transparency can be seen as an objective in itself: Article 19 of the Universal Declaration of Human Rights enshrines a fundamental right of access to information in the public sector. Transparency can also be seen as a means of achieving improved governance. Transparency informs the exercise of voice by citizens, helping them influence decision making through their representatives and the political process. Providing stakeholders with information about the public sector's intentions, actions and their consequences is also a necessary - but not a sufficient - condition for accountability ."

The non-disclosure of reports of FRBM Review Committee and EMC raises many issues, which should echo in Parliament.

First, when will the game of breaking, amending and even suspending FRBM Act, 2003 played by successive regimes stop?

The original FRBM Bill envisaged elimination of revenue deficit by 2005-06, which got revised to 2007-08 during the passage of the bill. And three days after the Act was enforced in July 2004, the Government decided to alter the law to further shift goal to 2008-09.

TFC fixed a revised target of zero revenue deficit for 2013-14, which UPA Government ignored happily. The 14 th Finance Commission recommended that revenue deficit should be eliminated "completely much earlier than 2019-20." Amended FRBM Act has set revenue deficit target of 1.4% of GDP for 2019-20.

Second, Will MPs seek some sort of penal action for reducing FRBM Act to a fiscal football?

Will they take a leaf out of Indonesian fiscal law that provides for impeachment of the Government for exceeding fiscal deficit? Will MPs cite the successful impeachment & removal of Brazilian President Dilma Rousseff for fiscal impropriety?

Third, Will FRBM Act be substituted by an effective debt law under Article 292 of the Constitution as envisioned by key architect of the Constitution, Dr B.R. Ambedkar? (See Replace FRBMA with debt ceiling law as mooted by Dr. Ambedkar).

Instead of exercising soft option of disrupting proceedings of Parliament, the Opposition should marshal all facts to force the Government to embrace full fiscal transparency.

MPs can refer to Comptroller and Auditor General's (CAG's) maiden report on Compliance of FRBM Act released in August 2016.

It says: "Government did not append additional disclosure statements as recommended by 12 th Finance Commission (November 2004) to bring more transparency in its operations."

CAG concluded that disclosures made by the Government in various Forms envisaged under the FRBM Act were not complete and at variance with other publications, such as Union Government Finance Accounts and Detailed Demands for Grants.

This fiscal opacity brings us back to IMF reports. SR says: "Rebuilding general government fiscal space and increasing the efficiency of public expenditure call for enhancing fiscal institutions of both the Union and the states. Fiscal responsibility frameworks should be strengthened to ensure compliance with fiscal targets and the quality of fiscal adjustment, including through setting up of an independent fiscal council for the center, strengthening medium-term expenditure and budget frameworks, and moving to accrual accounting."

The suggestion to set up an independent fiscal council (FC) has been advocated at least twice by Finance Commission. Neither UPA nor NDA mustered political will to accept & implement this invaluable idea.

India is today completely out of sync with all other reforms-oriented nations on the fiscal front. As many as 39 nations had constituted independent institutions under different names that IMF labeled them as FCs at 2014-end.

India's fiscal opacity reflects propensity of ruling party of the day to interpret electorate victory as a blanket permit to act as it wishes ostensibly in 'public interest'. Compare India with other countries and their autonomous provinces.

Take the case of Scottish Fiscal Commission (SFC). It will begin to produce its own independent forecasts of Scottish tax revenues and Scottish GDP in 2017-18. It is in process of being upgraded as statutory authority/a non-ministerial department from 1st April 2017. SFC's Commissioners are accountable to and give evidence to Parliament as required.

SFC released its Report on Scotland's Draft Budget 2017-18 December 2016. The concept of draft budget and its disclosure might perhaps rattle ruling alliance of the day in India.

We can cite such accountability work done by countries with or without fiscal councils.

If Modi Government still has any doubt about fiscal transparency & accountability deficit, it can refer to IMF's Fiscal Rules at Glance (FRG) released earlier this month. This compilation of fiscal rules of 96 countries assesses fiscal rules against certain four major parameters.

As for India's FRBM Act, FRG has mentioned 'No' against the parameter 'Formal Enforcement Procedure'. It has also written 'No' against 'Independent Body Sets Budget Assumptions'. Same 'No' appears against parameter –'Independent Body Monitors Implementation'. FRG has also listed 'No' against 4 th yardstick –'Well-Specified Escape Clauses'.

It would be apt to conclude with a quote from IMF's factsheet on Fiscal Transparency Code released in September 2016.

It says: "The degree of fiscal transparency can also help provide a sense of a country's fiscal credibility, and plays a role in how financial markets view the country's fiscal track record."