EUR 125.00 For Business Accounts Only

MOSL: FUEL OR ENGINES (ECONOMY)-Rising role of off-budget borrowings

FUEL OR ENGINES (ECONOMY): Rising role of off-budget borrowings; Center’s true fiscal deficit was at six-year high of 6.3% of GDP in FY19

 

• Extra-budgetary resources (EBR) or financing fiscal spending through off-budget borrowings is nothing new. EBR is included in the definition of debt, but is not part of fiscal deficit. However, the excessive reliance of the central government (CG) on EBR in recent years demands caution. Reported fiscal deficit (RFD) needs to be carefully topped up with (net) borrowings of various government agencies to arrive at a true adjusted fiscal deficit (adj. FD) of the center.
• In this note, we estimate that the adj. FD of the CG stood at 6.3% of GDP in FY19, much higher than the RFD of 3.4%. Our calculations suggest that the CG's adj. FD increased from a nine-year low of 4.8% in FY17 to 5.4% in FY18 and further to a six-year high of 6.3% of GDP in FY19. Further details suggest that the outstanding arrears on account of subsidies were at a decade-high of 1.3% of GDP (or INR2.5t) in FY19, while the off-budget capital spending was 1.6% of GDP (or INR3.0t), more than 3x the average size of 0.5% of GDP during the two decades up to FY17.
• The combined FD of the general government (center + states) thus was at a seven-year high of 8.8% of GDP in FY19, as against the RFD of 5.9%. According to our , household net financial savings were broadly unchanged at ~6.7% of GDP in FY19, implying that the government's net borrowings were >130% of household surplus - highest since the late-1990s. These facts not only douse any case for a fiscal stimulus but also explain the ineffectiveness of monetary easing.