Central bankers who are leading the current cycle of monetary tightening around the world are looking askance at fiscal laxity, which could deepen the disease of inflation even as monetary medicine is applied. How are we doing in India fiscally?

The budgeted budget deficit of the Center for 2022-23 at 16.6 trillion, or 6.4% of gross domestic product (GDP) as projected at the time, but 6.2% of likely GDP for 2022-23 from 269.5 trillion (notwithstanding Q1 figures for this fiscal year). Total government debt was set at 3.5% of GDP by the Fifteenth Finance Committee (FFC), with an additional 0.5% for power sector reforms. Even if only 60% of this additional supply is reached, an overall state deficit of 3.8% added to 6.2% in the Center is a consolidated deficit of 10% (before Ukraine).

This is significant, but manageable as long as no other embezzled borrowing outside of the budget funds government spending. It turns out that off-budget borrowing had indeed increased alarmingly since 2016-17 at the Centre, but was (largely) brought into the budget in 2020-21. The timing of this relocation in the pandemic year 2020-21, when so many other amounts of income and expenditure had gone haywire, was totally brilliant.

At the state level, it’s a different story. They, too, engaged in off-budget borrowing well before 2016-17, but these have yet to be brought on-budget. In March 2022, the Central Ministry of Finance notified the states that their off-budget borrowing in 2022-21 and 2021-22 (the first two years of the CTF period) should be on-budget in 2022-23 and deducted from their FFC rights for the year. These actions of the Center are authorized under Article 293(3) of the Constitution. New government borrowing will therefore be below their total authorized limit of 3.5%.

How much drop? There should in principle have been a list in the state budget documents of government borrowing through state-level public sector enterprises (SPSUs) at the very least, but no aggregate is readily available. Ananth Narayan, in a research note for the Observatory Group, innovatively estimates off-budget overspending by the excess of budget expenditures over actual expenditures. This state surplus over the past two years amounts to 7 trillion. His estimation procedure reveals more than just SPSU borrowings, which are only done for large projects (like the Food Corporation of India’s borrowings from the Centre). It also covers the accumulation of debts through the practice of late payments to suppliers, possibly paid in subsequent years by delaying other payments due. This form of borrowing from a diverse and changing body of hapless coerced lenders probably grew over time.

But since states also manage unmet spending through the simple device of eliminating smaller projects that don’t matter electorally, instead of borrowing, the estimate overestimates non-voting borrowing. budget. Although the stock is estimated at 6 trillion, or still 2.2% of GDP, which would leave governments with new borrowing of only 1.3% of GDP out of their authorized total of 3.5%. As this is clearly untenable, the Ministry of Finance recently announced that the offshoring would be staggered over the remaining four years of the CTF period, until 2025-26.

Off-budget government borrowing before 2020-21 is not covered by the budget (another 7.5 trillion between 2016-17 and 2019-20). And it leaves out two other serious fiscal threats at the state level.

One is pensions, where the transition to a defined contribution system has not gone smoothly at the state level. In a recent notification, the Ministry of Finance authorized additional borrowing for states to encourage this transition. But that alone will not be enough. Some restructuring of the new system is needed or states will fall back to the old defined benefit system with wage indexation, a uniquely Indian and financially disastrous feature.

The other is the dire state of the electricity sector, which falls under state jurisdiction under the Constitution. Electricity distribution companies (Discoms) are unable to pay their suppliers (Gencos), due to unreformed tariffs. States promise compensatory subsidies to Discoms, which provide partial coverage at best, and are often never paid. Discoms cover their losses by borrowing from public sector banks, or more recently from non-bank financial intermediaries like the Power Finance Corporation (PFC). These loans are explicitly or implicitly guaranteed. Alternatively, the Discoms simply accrue arrears to the Gencos, currently estimated at 1 trillion.

In a recent crackdown on August 18, the Department of Energy barred 13 states from accessing the power exchanges where they buy their electricity, effective immediately, until they pay their current bills. in Gencos, amounting to 5,100 crore. A June notification established a payment and penalty schedule for unpaid arrears to Gencos in a maximum of 48 equal monthly installments. Since further loans, even from the PFC, are unlikely to be forthcoming, this payment of arrears will have to be financed by the states.

And finally, there is the post-Ukraine additionality to the Centre’s budget deficit of around 1% of GDP. These are test times.

Indira Rajaraman is an economist

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