Centre was sensitive to fiscal deficit: Garg on CAG’s bank recap concerns

Subhash Garg, the Department of Economic Affairs (DEA) secretary all through the several years when the Comptroller and Auditor Standard (CAG) of India had flagged the situation of the finance ministry not displaying financial institution recapitalisation as fiscally non-neutral, stated the governing administration at that time was sensitive to fiscal deficit.

The governing administration can now present recapitalisation as affecting deficit. The governing administration is no for a longer period sensitive to fiscal deficit as it was elevated to 9.five per cent of gross domestic products (GDP) in the Revised Estimates (RE), from 3.five per cent in the Budget Estimates (BE) for the present-day fiscal yr, Garg advised Enterprise Standard.

The CAG had elevated this situation for the Budgets of 2017-eighteen (FY18) and 2018-19 (FY19). Garg was DEA secretary from July five, 2017, to July 26, 2019. He was responsible for the Budget-producing work out for 1 of these two several years — FY19. He was also finance secretary from March 1, 2019, to July 26, 2019.

“I think the governing administration then was acutely aware about maintaining fiscal deficit very low. The government’s sensitivity in direction of fiscal deficit is no for a longer period there. Fiscal deficit was elevated to 9.five per cent of GDP by shelling out the Meals Corporation of India’s earlier liabilities. If it were being to be carried out now, we should see how this RS 20,000 crore of very last yr or the present-day yr has been taken care of on the fiscal account as asset and legal responsibility,” he stated.

In its report presented to Parliament very last thirty day period, the CAG had pulled up the governing administration for not factually displaying in the FY18 and FY19 Budgets that financial institution recapitalisation of general public sector banks (PSBs) is fiscally non-neutral.

The CAG stated the governing administration built an expenditure of Rs eighty,000 crore in FY18 and Rs 1.06 trillion in FY19 for recapitalisation of PSBs.

Funds for these investments were being elevated by the governing administration by the situation of non-transferable special securities to the exact PSBs.

The CAG observed that in the Expenditure Budget, the abovementioned expenditure on recapitalisation of PSBs had been netted from receipts from situation of special securities. In the Receipt Budget, receipts from securities had been netted from expenditure on recapitalisation.

This procedure is reflected in the computation of fiscal deficit in Budget At a Look (BAG) and in the Medium-Phrase Fiscal Policy Assertion (MTFPS). Even so, in the Union Authorities Finance Accounts, the securities issued to PSBs have been appropriately accounted as interior personal debt of the governing administration and receipts from the exact as personal debt receipts.

CAG stated netting of these receipts from expenditure on recapitalisation and expenditure in PSBs in BAG and MTFPS was not in line with the Fiscal Obligation and Budget Administration (FRBM) Act, 2003.

The finance ministry agreed that that financial institution recapitalisation, although hard cash-neutral, is not fiscally neutral considering that the situation of securities would get reflected in total governing administration personal debt. In addition to, coupon payments for special securities when built would be reflected in the fiscal deficit of the related yr.

Simple fact stays that the expenditure should have been revealed separately from receipts and not netted, stated CAG.

If financial institution recapitalisation is revealed in fiscal deficit, the gap in between the Union government’s expenditure and profits would have improved to 3.7 per cent of GDP in FY18, from 3.five per cent revealed in the Budget. Likewise, the Centre’s fiscal deficit would have risen to 3.9 per cent of GDP in FY19, from 3.4 per cent revealed in the Budget.

If recapitalisation is now revealed in following year’s Budget as expenditure, fiscal deficit would turn into 9.6 per cent on account of the ~20,000 crore of recapitalisation account, from 9.five per cent revealed in the RE for 2020-21. For 2021-22, the deficit would boost to 6.9 per cent of GDP, from 6.eight per cent from the BE on account of Rs 20,000 crore of recapitalisation.

To a query no matter if the procedure of recapitalisation on the fiscal account was from the FRBM Act of 2003, the previous economic affairs secretary stated it was if 1 were being a fiscal purist.

He stated expenditure in banks should be revealed as cash expenditure and expenditure by banks in bonds as borrowings of the governing administration.

“If you take care of that, then the financial institution recapitalisation would be non-neutral on the fiscal account and it would elevate fiscal deficit and by the exact sum, liabilities would go up automatically. Purist fiscal procedure is this,” he stated.

To that extent, what the CAG stated is right, stated Garg.

“However, the CAG also likely famous that the governing administration had meant to make it fiscally neutral. Worse could have been that you really do not present it as an boost in governing administration legal responsibility. But that was not carried out. The governing administration transparently showed that liabilities went up. But to depress fiscal deficit or preserve it reduced, it was kept as neutral. It should have been disclosed on both equally sides as expenditure and borrowing and fiscal deficit should have also long gone up,” he stated.