The one truly big reform in Budget 2021

The government is finally declaring fiscal deficit accurately and not hiding behind accounting jugglery.

ByVivek Kaul
The one truly big reform in Budget 2021
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In the 143rd paragraph on page 26 of finance minister Nirmala Sitharaman’s budget speech was this line: “I propose to discontinue the NSSF Loan to FCI for Food Subsidy and accordingly budget provisions have been made in RE (revised estimate) 2020-21 and BE (budget estimate) 2021-22.”

In this line perhaps is the single biggest reform in the annual budget of the union government for 2021-22 which was presented earlier in the day today.

Let’s take a look at this pointwise and try and understand why I say so.

1) Dear reader, there are two things that you need to keep in mind while reading this piece. First, the union government’s budget, despite all the hungama around it, is ultimately a presentation of its financial accounts. And these accounts need to be presented in as accurate a way as possible.

Second, the government of India works on cash accounting. This means that only when the money leaves the government’s bank account is it recognised as an expenditure. It doesn’t matter if the expenditure has been incurred by a government agency acting on behalf of the government. As long as the government hasn’t paid the agency for it, it is not recognised as an expenditure.

2) The Food Corporation of India, or FCI, along with other state procurement agencies buy rice and wheat directly from farmers on behalf of the government, at a minimum support price, or MSP, announced by the government every year. While the government announces the MSP for 23 agricultural crops, it largely buys only rice and wheat directly from farmers through FCI and other agencies. Over the years, it has also started buying some amount of pulses, oil seeds and cotton.

Having bought rice and wheat, the FCI stores it in its godowns as well as private godowns. It then distributes this rice and wheat at extremely low prices through the public distribution system, or PDS, or rations shops, to meet the needs of food security.

In order to ensure that the FCI continues to be in operation, the government needs to compensate it for this difference in price. It does so by making allocations towards food subsidy in the annual budget.

The trouble is that over the years the allocation towards subsidy has never really been enough to compensate the losses that the FCI runs in selling rice and wheat through the PDS. Like in 2019-20, the total food subsidy that the FCI wanted to claim stood at Rs 3,17,905 crore. What it got from the government was Rs 75,000 crore, allocated as food subsidy in the budget.

Where did it get the difference from? A bulk of it was borrowed from the National Small Savings Fund, or NSSF. Collections under various small saving schemes, net of withdrawals, during a financial year, form the sources of funds for the NSSF. As of March 31, 2020, the FCI owed the NSSF Rs 2,54,600 crore.

3) Even though the FCI spent the subsidy amount it was claiming to subsidise rice and wheat sold through the PDS, the government hadn’t paid the FCI for it. Hence, money hadn’t left the bank account of the government. And given the government follows cash accounting, this amount did not end up as an expenditure even though the FCI, an arm of the government, had already spent it on behalf of the government.

4) If the government were to follow accrual accounting, where an expenditure is recognised as an expenditure the moment it is incurred, irrespective of whether money has left the bank or not, its total expenditure would be much more than that it officially declared in the budget.

Take the case of the budget presented in February 2020. The total fiscal deficit of the government for 2020-21 (and this was before the Covid pandemic struck India) was expected to be at Rs 7.96 lakh crore. The fiscal deficit is the difference between what a government earns and what it spends, during the course of a year. The food subsidy that was budgeted for the year was around Rs 1.16 lakh crore. This when the FCI’s subsidy bill was estimated to be at Rs 3,08,680 crore. Of course, the government didn’t pay the FCI directly and it had to borrow money from the NSSF.

Through this accounting jugglery of cash accounting, the government underdeclared its total expenditure and in the process, its fiscal deficit.

5) While presenting the budget for 2021-22, the finance minister decided to take the leap and discontinue the facility of the loan from the NSSF which was made available to the FCI. This change has been made applicable in government accounts for 2020-21 as well.

The food subsidy allocated to the FCI when the budget for 2020-21 was presented in February last year stood at around Rs 77,983 crore. This has now been revised to Rs 3,44,077 crore. This means that the accounting jugglery around food subsidies, and the money that the government actually owed the FCI in the process, has been brought to an end. The overall food subsidy for 2020-21 stands at Rs 4,22,618 crore as against the budgeted Rs 1,15,570 crore.

This move in itself pushed the fiscal deficit of the government up by at least Rs 2 lakh crore to Rs 18.49 lakh crore or 9.5 percent of the GDP. If the government had decided not to do this and continue with the previous cash accounting system, it could have been able to achieve a substantially lower fiscal deficit.

6) In fact, the allocation of food subsidies to the FCI during 2021-22 stands at Rs 2,02,616 crore. This is very high in comparison to the past and is one of the reasons why the fiscal deficit for 2021-22 will continue to remain very high at Rs 15.07 lakh crore, or 6.8 percent of the GDP.

But the good thing in all this is that the government is finally declaring the right fiscal deficit number and is not hiding behind accounting jugglery. At the cost of repetition, the most important part of the government’s budget is to present its financial accounts as accurately as possible. This is a step in that direction.

The next step would be to present the system-wide fiscal deficit by taking into account the borrowings of state governments as well as borrowings of public sector undertakings. That would make the system even more transparent.

Vivek Kaul is the author of Bad Money.

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