Off Budget Financing

Relevancy

  • G.S. Paper 3 (Economy)
  • Objective questions- Fiscal Deficit, Off-Budget Financing, FRBM Act,
  • Subjective questions-  Deficit Financing Mechanisms

Why In News?

  • The Comptroller and Auditor General (CAG) of India has pulled up the government for increased use of off-budget financing for schemes and subsidies in its Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act report for FY17.
  • This practice of off- budgeting masks the true extent of fiscal and revenue deficits.
  • The CAG of India recommended that the government to institute a policy framework for off-budget financing, which, should include a disclosure about its rationale and objective to parliament.

What is Off-Budget Financing?

  • This refers to expenditure that’s not funded through the budget.
  • For example, the government sets up a special purpose vehicle (SPV) to construct a bridge.
  • The SPV will likely borrow money to build the bridge on the strength of a government guarantee.
  • If it’s not a toll bridge, the SPV will need government support to meet interest obligations.

What is the issue?

  • Even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.
  • Since it’s not, this doesn’t reflect on the fiscal deficit number as well.
  • Governments across the world use this to escape budget controls.

Implications Of Off-Budget Financing

  • Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
  • But the cost is borne by the budget through some mechanism or the other.
  • Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
  • In the above example, the borrowing by the SPV should ideally be included in the government’s debt.
  • To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.
  • Hence, Parliamentary control on such spending is also reduced as its remains outside the budget.

Off-Budget Funding In FY17

Revenue Spending:

  • Deferred fertilizer arrears/bills through special banking arrangements
  • Food subsidy bills/arrears of Food Corp. of India through borrowings
  • Accelerated Irrigation Benefit Program through National Bank for Agriculture and Rural Development borrowing

Capital Spending

  • Indian Railway Finance Corp. borrowing for railway projects
  • Power Finance Corp funding of power projects

About Fiscal Responsibility and Budget Management (FRBM) Act

  • The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government
  • FRBM became an Act in 2003 which provides a legal-institutional framework for fiscal consolidation.
  • The rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government.
  • Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09.
  • It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of a breach.
  • The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.
  • The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.