CAG Criticises Modi Govt For Using Creative 'Off-Budget Financing' Techniques

The national auditor believes that such methods allow the Centre to understate the true fiscal and revenue deficits in a given year.

New Delhi: India’s national auditor has raised red flags over the Narendra Modi government’s propensity to borrow funds using “off-budget” methods, a practice that allows it to finance capital and revenue spending while maintaining deficit targets.

The criticism comes from an audit report tabled in parliament on Tuesday, but is a continuation of the manner in which the Comptroller and Auditor General (CAG) has questioned the Centre for severely understating the true extent of the country’s fiscal and revenue deficits.

“It came to notice that the Government resorts to off-budget methods of financing to meet revenue and capital requirements. The quantum of such borrowings is huge and current policy framework lacks transparent disclosures and management strategy for comprehensively managing such borrowings,” the most recent audit report notes.

Where exactly are these off-budget methods of financing taking place? Everything from fertiliser bills to financing power projects.

The CAG notes: “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 are not part of calculation of the fiscal indicators despite fiscal implications,” it added.

The auditor notes that off-budget financing is a tool for “deferring expenditure for subsequent years”.

This is a ‘creative accounting’ practice that was widely adopted by the UPA-I and UPA-II governments and was heavily criticised by the Bharatiya Janata Party as being fiscally profligate.

Table 1 – Food Subsidy Carryover                                                                                                                                                 

Year Subsidy ((Rs in crore) Carryover Liability ((Rs in crore)
2013-14 75,530 45,633
2014-15 91,995 58,654
2015-16 1,12,000 50,037
2016-17 78,335 81,303

For instance, as Table 1 above shows, the Modi government spent Rs 78,335 crore on food subsidies in 2016-17 and carried over Rs 81,303 crore to the next fiscal. This is a practice that it has continued from the UPA-era.

The finance ministry – in its response to the CAG, which is reproduced in the report – says that amendments made to the FRBM Act in 2018 have widened the “scope of Central Government debt”. And that it is thus “incorrect” to say that “there is no direct legislative control over off-budget borrowings”.

Nevertheless, the national auditor feels that the Centre should consider putting in place a policy framework for off-budget financing that would include greater disclosure to parliament. In its report, the CAG points out that the following should be transparently disclosed:

1) The rationale and objective of off-budget financing, quantum of off-budget financing and budgetary support under the same project/ scheme/programme, instruments and sources of financing, means and strategy for debt servicing of off budget financing, etc.

2) Details of off budget financing undertaken during a financial year by/through all the bodies/companies substantially owned by Government;

3)  Government may consider disclosing the details of off-budget Borrowings through disclosure statements in Budget as well as in Accounts.

Last year, as The Wire reported, the CAG highlighted several flaws in the Modi governments accounting procedures for FY 2015-16.

In particular, it noted that the government understated its fiscal deficit by a little over Rs 52,000 crore in 2015-16, which helped in showing compliance with the deficit target.