Fiscal prudence through disclosure: A key Budget move that went unnoticed

Statement 27-A, a voluntary disclosure of state-owned entities' borrowings, introduced in the Budget for 2024-25, enhances fiscal transparency and signals prudent fiscal management

A new and significant disclosure made by Finance Minister Nirmala Sitharaman in her Budget for 2024-25, presented on July 23 and approved by Parliament on August 8, has largely gone unnoticed. This disclosure is contained in Statement No 27-A in the expenditure document of the Budget.

Don’t confuse it with Statement No 27 in the same document, which lists the schemes and amounts financed through bonds fully serviced by the Union government and through loans from the National Small Savings Fund (NSSF), which have to be repaid by the exchequer. However, prudent fiscal management in the last couple of years has ensured that there has been no recourse to either such bonds or NSSF loans since 2021-22.

But Statement No 27 has still been retained in the expenditure document, reminding one of the fiscal impropriety that had been committed from 2016-17 to 2021-22. Note that both the bonds and NSSF loans are treated as part of government debt under the rules governing the Fiscal Responsibility and Budget Management (FRBM) Act. In other words, seeking recourse to them concealed the actual extent of the government’s fiscal deficit.

Worse, no mention of these bonds or loans was made in the Budget documents till March 2019. Statement No 27 made its debut in the expenditure document of the Budget for 2019-20, raising awareness about the lack of transparency in such matters. In the next two years, the finance ministry made conscious efforts to reduce the extent of recourse to such bonds and loans and, indeed, ended this practice from 2022-23.

Those six years (2016-17 to 2021-22) saw the Union government tapping the bonds and NSSF loans to the tune of Rs 6 trillion. Of this amount, NSSF loans accounted for Rs 4.61 trillion, and bonds made up about Rs 1.37 trillion. But in the last two years, the government undertook a major clean-up operation and repaid the entire NSSF loan, reducing the actual burden on the fisc to just about Rs 1.37 trillion. This is a commendable act of fiscal prudence.

Displaying almost similar prudence and transparency, the Budget document for 2024-25 has introduced for the first time Statement No 27-A, which lists the extra-budgetary resources tapped by select state-owned commercial undertakings, namely the National Highways Authority of India (NHAI) and the Indian Railways Finance Corporation (IRFC). The resources mobilised by these two undertakings are liabilities but are not treated as part of the Union government’s debt under the rules of the FRBM Act. Yet, the finance ministry has chosen to disclose these borrowings as additional information. That this is a voluntary disclosure, with no such requirement under the FRBM Act, underlines the seriousness and sincerity with which the finance ministry has approached the idea of fiscal prudence.

For instance, NHAI, set up under the National Highways Authority of India Act, borrows from the market and repays the loans from its toll collections and other receipts. Similarly, IRFC mobilises resources as part of its financing lease arrangements with the Indian Railways to help meet its rolling stock requirements. There are obvious financial risks for the central exchequer. If NHAI fails to collect enough toll revenue to repay its debts, the Union government will have to bail it out and the financial hit will have to be borne by the exchequer. And if IRFC falls short of funds to redeem its bonds on maturity or to repay the term loans owing to inadequate cash flows, the Union Ministry of Railways will have to make good such shortfalls.

The risks can get bigger if the total outstanding liabilities of NHAI and IRFC keep rising at a rapid pace, as they did till 2019-20 for the former and till 2020-21 for the latter. The outstanding liabilities of NHAI jumped over nine times from Rs 23,356 crore in 2013-14 to Rs 2.48 trillion in 2019-20. For IRFC, the outstanding liabilities rose over four times from Rs 76,539 crore in 2013-14 to Rs 4.09 trillion in 2020-21. In the last few years, the pace of increase in their outstanding liabilities has slowed considerably, as the  annual net additional borrowing has fallen. But there is no doubt that including this statement in the Budget document raises the awareness of everyone and conveys a message of caution to those who may have to manage public finance at the Centre in the future.

That message of caution is necessary because governments in the past have often shown a tendency to indulge in fiscal jugglery to hide the actual extent of their fiscal deficit. In his only Budget in 1987, Rajiv Gandhi quietly transferred the surplus money available in the Oil Pool Account to meet the government’s expenditure. This was a clever but an imprudent fiscal ploy to show a lower deficit.

Many years later, the United Progressive Alliance’s finance ministers, Palaniappan Chidambaram and his successor, Pranab Mukherjee, would issue oil bonds worth Rs 1.34 trillion to oil companies from 2005 to 2010, instead of directly subsidising them for the losses they suffered as they were not allowed to raise retail prices. Fertiliser bonds too were issued to fertiliser companies for the same reason. No budgetary disclosure of issuing these bonds was made till 2008-09.

Fortunately, this fiscally imprudent practice was stopped from 2010-11. But the fiscal impact of these bonds by way of interest payment continued to trouble succeeding governments including the current one. Even the Narendra Modi government indulged in the questionable practice of issuing bonds to recapitalise public sector banks. But, in this case, there was at least a disclosure, and the impact of the interest outgo and the principal repayment over the next years was made public. Nevertheless, such shifting of the burden of current expenditure onto future finance ministers and governments is a fiscally irresponsible act and even more harmful when done without disclosure.

The Budget for 2024-25 has for the first time included the provisional estimate of the key expenditure and receipt numbers for 2023-24, which were available by the time the Budget was presented in July. Using the latest numbers is a commendable decision. But even more commendable is the introduction of Statement 27-A in the current year’s Budget document without any compulsion under the FRBM Act.

Hopefully, this statement will be continued in the years to come so that the government, as also public policy commentators, can highlight any unusual rise in such outstanding liabilities, and the government can then treat it as a warning signal to take necessary steps. Perhaps, the outstanding liabilities of more government-owned statutory bodies, engaged in commercial activities should be included in this statement to make it more substantive and meaningful.