To
Smt Nirmala Sitharaman
Union Finance Minister
Dear Smt Sitharaman,
As one closely associated [as the then Chairman of the committee on Fiscal Responsibility and Budget Management (FRBM) legislation in the year 2000] with the idea of evolving a statutory framework for the Centre and the States to ensure transparency in terms of the disclosure of fiscal liabilities to their respective legislatures, I appreciate the Ministry of Finance’s efforts to impose fiscal disclosure norms both for the Centre and in the States.
In that connection, while answering a Parliament Question on 25-7-2022, you have made the following statement.
“Instances of borrowings by certain State Public Sector companies, Special Purpose vehicles (SPVs) and other equivalent instruments, where principal and/or interest are to be serviced out of the State Budgets, had come to the notice of the Ministry of Finance. Considering the effect of bypassing the NBC (Net Borrowing Ceiling) by of the States by such borrowings, it was decided and communicated to the States in March 2022 that borrowings by State Public Sector companies/corporations, Special purpose vehicles (SPVs) and other equivalent instruments, where principal and/or interest are to be serviced out of the State Budgets and/or by assignment of taxes/cess or any other State’s revenue, shall be considered as Borrowings made by the State itself for the purpose of issuing the consent under Article 293(3) of the Constitution of India”
It is perhaps your Ministry’s intention to consider such off-budget borrowings as a part of the Fiscal Responsibility and Budget Management norms of the States to be monitored by your Ministry. There is no doubt that the States should manage their liabilities, whether disclosed in the Budget or otherwise, in a prudent and a sustainable manner. The Centre cannot afford to gloss over any fiscal imprudence on the part of the States, as it would indirectly impact its own liabilities.
The need for the same kind of fiscal prudence applies to the Centre as much as to the States.
To what extent has the Centre taken steps to make a transparent disclosure of its own off-budget liabilities?
CAG Reports on FRBM:
The CAG has made the following observation in their Report No. 20/2018
“Government has increasingly resorted to off-budget financing for revenue as well as capital spending. In terms of revenue spending, off budget financing was used for covering deferring fertilizer arrears/bills through special banking arrangements; food subsidy bills/arrears of FCI through borrowings and for implementation of irrigation scheme (AIBP) through borrowings by NABARD under the Long Term Irrigation Fund (LTIF). In terms of capital expenditure, off-budget financing of railway projects through borrowings of the IRFC and financing of power projects through the PFC are outside the budgetary control. Such off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications”
This not only reflects lack of disclosure; it also puts major sources of funding of
Government’s crucial infrastructure projects beyond the control of the Parliament.
Apparently, your Ministry has not cared to recognise the wisdom implicit in the CAG report, as evident from an observation made subsequently by the CAG in their Report No. 6/2021.
“Government undertook funding of revenue and capital expenditure using extra budgetary resources in both the years. Expenditure met from extra budgetary resources laid out a conceptual framework for what constitutes extra- budgetary borrowings and of which entities, was lacking. This hampered a comprehensive measurement and disclosure of such borrowings and their impact on fiscal indicators are not part of calculations of the fiscal indicators but have fiscal implications. A clearly laid out conceptual framework for what constitutes extra- budgetary borrowings and of which entities, was lacking. This hampered a comprehensive measurement and disclosure of such borrowings and their impact on fiscal indicators”
Centre’s other off-budget fiscal transactions
In this connection, I would also like to point out that it is your Ministry, in consultation with the Niti Ayog, that has set in motion a huge scheme of “Monetisation of CPSE Assets”, with the sole purpose of raising “additional fiscal resources” for the Centre. Does it not also amount to off-budget raising of resources through the CPSEs for bridging the Centre’s fiscal deficit?
Had the CPSEs really wanted to raise resources to be invested on their own capacity expansion projects, they need not monetise their assets to private companies, whose credit ratings may be lower than the CPSEs’. It is a fallacious argument put forward by your Ministry that it could raise “additional resources” through asset monetisation, as private companies can at best access the same pool of savings in the economy as the government can on much better terms. The only difference is that, instead of allowing the necessary managerial freedom to the CPSEs, by this, your Ministry would be forcing them to alienate their assets.
It is ironic that your ministry should force the CPSEs to monetise their assets on the one hand to raise resources and also force them to divert their own internal surpluses to fill the Centre’s coffers through inordinately high dividend payments.
Considering that fiscal prudence is the need of the hour, should not your Ministry practice what it preaches to the States?
Regards,
Yours sincerely,
E A S Sarma
Former Secretary to Govt of India
Visakhapatnam
