Need for transparency in disclosing tax liabilities under FRBM | Counter-currents
Smt Nirmala Sitharaman
Union Finance Minister
Dear Smt Sitharaman,
As a person 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 Center and the States to ensure transparency in terms of the disclosure of tax debts to their respective legislatures, I appreciate the efforts of the Ministry of Finance to impose standards for tax disclosure both for the Center and for the States.
In this regard, when answering a question from Parliament on 25-7-2022, you made the following statement.
“Cases of borrowings by some state public sector corporations, special purpose vehicles (SPVs) and other equivalent instruments, the principal and/or interest of which must be repaid from state budgets, were reported to the Ministry of Finance. Considering the effect of the circumvention of the NBC (Net Borrowing Ceiling) by the States by such borrowings, it was decided and communicated to the States in March 2022 that the borrowings of the companies/public sector companies of the State, securitization vehicles (SPV) and other equivalent instruments, the principal and/or interest of which must be paid from state budgets and/or by assignment of taxes/tax or any other state revenue, are considered as borrowing by the state itself for the purpose of granting permission under Article 293(3) of the Constitution of India”
Your department may intend to consider such off-budget borrowing as part of the standards of fiscal responsibility and state budget management to be monitored by your department. There is no doubt that States must manage their liabilities, whether published in the budget or otherwise, in a prudent and sustainable manner. The Center cannot afford to ignore any fiscal imprudence on the part of the States, as this would have an indirect impact on its own debts.
The need for the same type of budgetary prudence applies as much to the Center as to the States.
To what extent has the Center taken steps to transparently disclose its own off-budget commitments?
CAG Reports on FRBM:
The CAG made the following observation in its report n° 20/2018
“The government is increasingly using off-budget financing for revenue as well as capital expenditure. In terms of revenue expenditures, off-budget funding was used to cover deferral of arrears/fertilizer bills through special banking arrangements; Food Subsidy Bills/Arrears from FCI through Loans and for Irrigation Scheme Implementation (AIBP) through Loans by NABARD under the Long Term Irrigation Fund (LTIF) . In terms of capital spending, the off-budget financing of rail projects through loans from the IRFC and the financing of power projects through the PFC are beyond budget control. Such off-budget funding is not part of the calculation of budget indicators despite the budget implications”
This not only reflects the lack of disclosure; it also places major sources of funding for
Government’s critical infrastructure projects beyond the control of Parliament.
Apparently, your department did not bother to acknowledge the wisdom implicit in the CAG report, as evidenced by a later observation made by the CAG in its report No. 6/2021.
“The government undertook to fund revenue and capital expenditure using extra-budgetary resources in both years. The expenditures covered by extrabudgetary resources established a conceptual framework for what constitutes extrabudgetary borrowing and which entities were lacking. This has hampered full measurement and disclosure of these borrowings and their impact on fiscal indicators is not part of the fiscal indicator calculations but has fiscal implications. There was a lack of a clearly defined conceptual framework of what constitutes extrabudgetary borrowing and from which entities. This has hampered full measurement and disclosure of these borrowings and their impact on fiscal indicators”
Other non-budget fiscal operations of the Center
In this regard, I would also like to point out that it was your ministry, in consultation with the Niti Ayog, which set in motion a vast program of “monetization of CPSE assets”, with the sole aim of raising “fiscal resources supplements” for the Centre. Isn’t it also an off-budget fundraising through the CPSEs to make up for the Centre’s budget deficit?
If the CPSEs had really wanted to raise resources to invest in their own capacity expansion projects, they would not have needed to monetize their assets with private companies, whose credit ratings might be lower than those of the CPSEs. . This is a spurious argument made by your department that it could raise “additional resources” through asset monetization because private companies can at best access the same pool of savings in the economy as the government at many much better conditions. The only difference is that instead of granting the necessary freedom of management to the CPSEs, your ministry would thereby force them to dispose of their assets.
It is ironic that your ministry forces CPSEs to monetize their assets on the one hand to raise resources and also forces them to divert their own internal surpluses to fill the Center’s coffers through disproportionately high dividend payments.
Considering that budgetary prudence is in order, shouldn’t your ministry practice what it preaches to the States?
Former Indian Government Secretary