In the past few years, the RBI has exclusively focused its attention on fiscal management of states, often pointing at all transgressions, while giving a free pass to delinquent industries as well as the Centre. To serve the economy better, it must change course. The list of omissions is long. Here are a few significant ones.
State governments on target, free pass to industry and Centre
Its latest report on states' finances, released on December 11, 2023, is relatively mild – having dented its own reputation in 2022 (explained later). In this report, it concludes that state finances continue to be robust "with adequate fiscal space for undertaking higher capex." Here is what it shows about states' fiscal performance (all in percentage of GDP):
· Fiscal deficit: 2.8% in FY23 (RE) which is "below the budget estimate for the second consecutive year" and also below "the Centre's limit of 4%." This was "primarily (achieved) through a reduction in revenue deficit." For FY24, fiscal deficits are budgeted at 3.1%. Average fiscal deficit for seven fiscals of FY18-FY24 is 2.9% (less than the FRBM limit of 3%, the Centre has allowed an additional 1%).
· Revenue deficit: "Near elimination of the revenue deficit" with 0.3% in FY23 (RE) and 0.1% in FY24 (BE). Average of seven fiscals of FY18-FY24 is 0.5%.
· Revenue surplus: 14 states/UTs in FY22 (actual), 18 in FY23 (RE) and 20 in FY24 (BE) – of the 31 states/UTs it covered.
· Capex: Budgeted to “increase by 42.6% to 2.9%” in FY24 (BE). Average of six fiscal of FY19-FY24 is 2.6%. The Economic Survey of 2022-23, however, shows the average far higher at 3.7% for six fiscals of FY18-FY23).
· Outstanding liabilities/debt: Budgeted to fall to 27.5%, from the peak of 31% in FY21 (pandemic fiscal). Average of FY18-FY24 is 27.5% (FRBM limit is 20%).
Nonetheless, RBI flagged "many states" have outstanding liabilities of over 30%; "primary deficit remained sizeable" (although merely 1.2% of the GDP); "19 States and UTs have budgeted a GFD-GSDP ratio exceeding the FRL limit of 3%"; a few states returning to the old pension system (OPS) and others moving in that direction “would exert a huge burden on State finances” with "additional burden reaching 0.9% of GDP annually by 2060" (ignoring revenue surplus in 20 states/UTs) and "restrict their capacity to undertake growth enhancing capital expenditures etc."
In sharp contrast, the RBI hasn't critically examined the Centre's fiscal performance. Here is what the data of Economic Survey of 2022-23 and 2023 budget reveal about the Centre’s fiscal performance:
· Fiscal deficit was 6.4% in FY23 (RE) and budgeted at 5.9% in FY24 (BE); average of seven fiscals of FY8-FY24 is 5.7% of the GDP – far above the FRBM limit of 3% (as against states’ less than the limit).
· Revenue deficit was 4.1% in FY23 and is budgeted at 2.9% in FY24; average for FY18-FY24 is 3.9% (far higher than states).
· Centre’s capex was 2.7% in FY23 and budgeted at 3.3% in FY24; average for FY18-FY24 is 2.2% (far less than states’ 2.6-3.7%).
· Outstanding liabilities (debts) were 57% in FY23 and budgeted at 57.2% in FY24; average of FY18-FY24 is 54.3%, which is far higher than the FRBM limit of 40% (far higher to states’ 27.5% too as against their FRBM limit of 20%).
Both the trends (of states and Centre’s) are historical, more so in the entire 2011-12 GDP series. Hence, there is a need to focus on the Centre.
Its criticism of states’ finances is relentless and harsh.
In June and July 2022, its June 2022 bulletin first warned of a Sri Lanka-like "financial risks" developing in India because of states' rising "non-merit freebies" (ranging from 0.1% to 2.7% of GSDP), “off-budget” borrowing (going up to “4.5% of the GDP”) when their “own tax revenue” was on "slowdown" and said states’ fiscal conditions were “showing warning signs of building stress”. Its July 2022 bulletin asked: “Are financial risks moving sub-national?”
Finally, it corrected itself months later in January 2023; commended states for their fiscal prudence; freebies, off-budget borrowing and rising debt were conspicuous by absence and instead it noted that 19 states/UTs were revenue surplus. This report came months after finance ministry think tank NIPFP ran counter to RBI’s findings (“Beware of Lanka-like crisis with 'non-merit freebies’” and “States' fiscal space rapidly shrinking, here's why...”).
The RBI’s 2022 reports coincided with the Centre’s campaign against ‘revdi’ and ‘revdi culture’ of state governments – ahead of the state elections in Himachal Pradesh and Gujarat (and after the Punjab elections which the Aam Admi Party won).
In 2019, in response to the Centre’s offensive against farm loan waivers by states, RBI said in “Report of the Internal Working Group to Review Agricultural Credit” (September 2019) that there was “an unprecedented increase” in farm loan waivers during 2014-2019 by 10 states, blaming this for increasing agriculture NPAs “sharply” to 8.44% in FY19. It called the loan waivers “not the panacea” and condemned saying, “they destroy the credit culture”, “harm the farmers’ interest” and “squeeze the fiscal space”.
The fact is: (i) loan waivers are paid by states and hence, no burden on banks (ii) at that time, agriculture’s share of NPAs in SCBs (RBI data) was mere 8.5% (industry accounting for the rest 94.5%) (iii) Centre’s farm loan waiver of Rs 60,000 crore had an impact in 2008 budget (by UPA-I) (iv) Centre had introduced a cash transfer of Rs 6,000 (PM-Kisan) to all farmers (including big farmers owning 10 hectare and above) announced earlier in the year and (v) write-off of corporate loan defaults, including those of declared fraudsters and willful defaulters since FY15 (rising to Rs 14.6 lakh crore by FY23).
Besides, the RBI guards identities of declared (by banks) fraudsters and willful defaulters, who keep multiplying by the year and also flee the country with bank loans as their loans are written off, except once in February 2021 which was in response to a RTI query. The RBI guards their identity on the plea of protecting business interests. Rather, in June 2023, RBI offered “compromise settlement” with them and made them eligible for fresh loans after 12 months! This was weeks after the RBI Governor flagged (on May 29) that banks were indulging in “innovative ways to conceal the real status of stressed loans”.
Nothing can create more macro-financial risks for the economy than such practices and policies.
There is more.
Centre's fiscal performance
The CAG has been flagging GST Compensation Cess, disinvestment proceeds and many other cesses and surcharges which are meant for specific and exclusive use but ploughed into the Consolidated Fund of India (CFI). After examining the CAG audit reports from 2020 to 2022, the Centre for Social and Economic Progress (CSEP) said (in 2023) that the Centre’s off-budget borrowing disclosures (Statement 27”) had "deficiency in the format," was "incomplete" and suffered from "non-disclosure of certain entities’ debt." Fortune India ("5 ways to resolve the unfinished agenda of freebies") noted how Centre's Statement 27 does not disclose off-budget borrowings – disclosing only ₹1.39 lakh crore during FY17-FY22 while the revised FY21 budget alone showed food and fertiliser subsidy skyrocketing from the budgeted ₹1.9 lakh crore to ₹5.6 lakh crore (excess of ₹3.7 lakh crore).
Ironically, on the off-budget borrowing disclosed in the FY22 budget, the RBI said in its analysis of the Centre's budget that it brought "greater fiscal transparency," describing it as "another positive aspect" of the budget and that this "has been well received by the markets as well."
Perusal of its analysis of the Centre’s budget for FY21, FY20, FY19 and FY18 shows the RBI did not flag ‘off-budget’ borrowing.
Its analysis of FY23 budget, titled "Union Budget 2022-23: Some Pleasant Fiscal Arithmetic," hailed Centre’s fiscal performance saying it, "calibrates a thrust to growth with feasible rectitude," "moderation in the cyclically adjusted fiscal deficit," "going forward, debt reduction needs to assume prominence in the fiscal policy strategy" etc.
Its budget analysis of 2023-24 calls provision of “capital expenditure as a key lever of growth”, commitments to “credible fiscal consolidation for strengthening macro-stability”, “public debt levels have moderated” as the Centre “resorted to prudent fiscal management notwithstanding the challenges induced by the pandemic” etc.
Centre’s debt has since grown from Rs 56.7 lakh crore in FY14 to Rs 152.2 lakh crore in FY23. It has missed fiscal deficit targets every fiscal since FY12, its tax-to-GDP remains stuck at 10-11% since FY12.
Even with the industry, the RBI must note routine misreporting of trade invoices (India-China trade data mismatch has increased to $15 billion in Jan-Oct), private investment is stuck despite corporate tax cut and a series of tax incentives, the insolvency and bankruptcy processes leading to huge loss of bank loans (17.6% recovery, 75% firms ending in scrap sale during FY18-FY23). NCLT recently approved sale of Reliance Communications for just 0.96% (Rs 455.9 crore) of the ‘admitted claims’ (Rs 47,251 crore).
Does such approach improve fiscal management? That’s to ponder over!
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