New Delhi: India’s national auditor has criticized the Narendra Modi government for borrowing through off-budget channels to finance capital and revenue spending in 2016-17, a practice that masks the true extent of fiscal and revenue deficits .

In a report presented in the Parliament on Tuesday, the Comptroller and Auditor General of India (CAG) recommended that the government consider instituting a policy framework for off-budget financing, which, among others, should include a disclosure about its rationale and objective to parliament.

In its audit report on Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 for fiscal 2016-17, CAG said that in terms of revenue spending, off-budget financing was used for covering the deferment of fertilizer bills through special banking arrangements; food subsidy bills of the Food Corporation of India through borrowings and for implementation of irrigation scheme (Accelerated Irrigation Benefits Programme) through borrowings by the National Bank for Agriculture and Rural Development (Nabard) under the Long Term Irrigation Fund.

“In terms of capital expenditure, off-budget financing of railway projects through borrowings of the IRFC (Indian Railway Finance Corp.) and financing of power projects through the PFC (Power Finance Corp.) are outside the budgetary control. Such off-budget financing are not part of calculation of the fiscal indicators despite fiscal implications," CAG observed.

For example, the government spent ₹ 78,335 crore for food subsidy in 2016-17 and carried over ₹ 81,303 crore to the next fiscal. Similarly, for fertilizer subsidy during the same year, it spent ₹ 70,100 crore and carried over ₹ 39,057 crore to the next year.

CAG said the huge off-budget financing lacks transparent disclosures and could pose fiscal risk in the long term in case the entity that raises the funds fails to meet debt servicing.

The finance ministry, however, refuted the CAG charge by maintaining that since amendments to the FRBM Act in 2018 include a debt target, it is incorrect to say that there is no direct legislative control over off-budget borrowings.

The government has made comprehensive amendments in the FRBM architecture through the Finance Act, 2018, presented along with Budget 2018-19, in view of the recommendations made by the FRBM Review Committee headed by N.K. Singh. In the revised FRBM architecture, the government will simultaneously target debt and fiscal deficit and treat fiscal deficit as an operational target, with the focus on achieving the target of 3% of gross domestic product by the end of 2020-21.

However, CAG maintained that off-budget financing is a tool of deferring expenditure for subsequent years as the modality of repayment of borrowing is not spelt out.

“Government has adopted off-budget means of financing the subsidy arrears, thereby deferring the payment in the relevant financial year and in the process also incurring additional cost by way of interest payments," it said.

CAG recommended that the disclosure to Parliament on off-budget liabilities should be threefold. Firstly, the rationale and objective of off-budget financing; quantum of off-budget financing; instruments and sources of financing; and means and strategy for debt servicing of off-budget financing. Secondly, details of off-budget financing undertaken during a fiscal by all the bodies substantially owned by the government should be disclosed. Thirdly, the government may consider disclosing the details of off-budget borrowings through disclosure statements in the budget.

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