In his maiden Budget, finance minister Arun Jaitley had announced the setting up of an Expenditure Management Commission (EMC) to recommend a roadmap for rationalising and phasing out the major subsidies. As a follow-up, on September 4, the government constituted the EMC with former RBI Governor Bimal Jalan as the chairman.
The EMC’s mandate puts under the scanner the government’s spending on all its programmes and schemes, all its procurement (from defence to office items) besides the methodology for counting receipts and expenditure. It is expected to recommend measures for utilisation of allocated funds in the most cost-effective manner.
Jaitley has said that the recommendations the EMC made in its interim report will form the basis for subsidy reforms—with emphasis on rationalisation and elimination of leakages—to be announced in Budget FY16.
The EMC has reportedly favoured switching to accrual-based accounting of receipts and expenses from cash-based accounting method that is currently followed. It has expressed strong disapproval of the practice of deferring/postponing major payments, especially subsidies to the following year.
These ideas need to be viewed against the backdrop of successive governments in the past frequently resorting to window-dressing to camouflage real expenses and revenue inflows. So, how is the existing system amenable to window-dressing? How will the proposed system help in putting a stop to this?
Under the existing dispensation of accounting on cash basis, income/receipt is counted when the cash (or a cheque) is received and expenses are recorded when actual payments are made. On the other hand, as per the accrual basis, transactions are recorded when they happen irrespective of when the money is received or paid.
The government spends hundreds of thousands of crores of rupees on major subsidies—fertilisers, food, fuel—every year (the respective Budgets provided for R2.45 lakh crore in FY14 and R2.51 lakh crore in FY15 under these heads). Payments are made as reimbursement to manufacturers or agencies who sell these products at ‘controlled’ prices that are lower than cost of production/procurement, handling and distribution.
The FCI and other agencies handling government foodgrain procurement and distribution provide foodgrains to the beneficiaries under the PDS and the Targeted PDS at prices much lower than the cost. The government reimburses the differential amount as subsidy.
In fertilisers, the government directs manufacturers to sell urea at a low, statutorily-controlled price. The excess of production and distribution cost of each producing unit is reimbursed as subsidy under the New Pricing Scheme (NPS). Producers of complex fertilisers get subsidy at uniform rate under the Nutrient-Based Scheme (NBS).
In oil too, PSUs—IOC, HPCL, BPCL—sell LPG and kerosene at low prices as directed by the government. The resulting under-recoveries (computed as excess of import parity price—IPP—over sale price) are met partly from the subsidy and the rest through discounts on crude sale by ONGC and OIL. Diesel was also covered by this subsidy till October 2014 when it was decontrolled.
The routing of subsidy through fertiliser manufacturer, oil companies, FCI et al gives the government infinite leverage in deciding when to release funds. Ironically, even as the former extends subsidy (inherent in selling product at low price) to beneficiaries throughout the year on every unit of material sold, the latter makes reimbursements at its sweet will. The absence of norms only heightens the scope for discretion.
In fertilisers, the existing guidelines require that for the sales made in any given month, the government should release payments within 45 days of submission of claim by the manufacturer. But this stipulation is observed more in its breach. The fact that there is no provision for interest on delayed payments renders this norm unfruitful. In other areas, even norms on paper do not exist.
It is no surprise that successive governments have gotten used to deferring payments to the succeeding year in a bid to show a healthy balance sheet. In the 1990s, amounts deferred used to be in hundreds of crores of rupees, in the first decade of the 21st century and now mid-way in the second, these run in to several thousands of crores!
In fertilisers, for FY09, subsidy payments deferred totalled an unprecedented R50,000 crore. While this declined to R17,000 crore in FY12, it climbed to R32,000 crore in FY13 and to R38,000 crore in FY14. In oil and food, subsidy payments rolled over in FY14 were R43,500 crore and R40,000 crore, respectively.
All this has taken a heavy toll on fertiliser manufacturers and oil PSUs by the way of serious liquidity problems, huge interest burdens denting profits and has caused suspension of production. This has discouraged investment in scaling up capacity, leading to heavy dependence on imports and increased subsidy outflow as the imports come at much higher costs.
The extant existing method of cash accounting by permitting recording of expenses though they have actually been paid acts as a cover up for all these omissions and commissions. The mandarins in finance ministry first estimate the likely fiscal deficit vis-a-vis the target and then determine how much payments to make under subsidies on fertilisers, food and oil so as to reach the target. The true picture about government finances remains shrouded in a veil. This veil can be lifted only if the government acts on the suggestion of the commission to switch over to accrual-based accounting of receipts and expenses. This will leave no scope whatsoever for fudging of accounts as expenses will necessarily have to be recorded in the year the transaction happened, regardless of actual payment.
The government will then be compelled to make payments to manufacturers and oil PSUs in time (as it would have nothing to gain from fudging), thereby putting an end to the nightmare the latter have been going through for decades.
Hopefully, the Modi government will take a call on this major expenditure reform in Budget FY16.
By Uttam Gupta
The author is a Delhi-based policy analyst
