In FY13, India's fiscal deficit was at 4.8% of GDP. And the finance minister has given assurance that in FY14, the government will be able to rein in the deficit through various austerity measures. However, considering the huge subsidy bill and falling tax receipts reining in the deficit appears difficult. Yet the government is confident of doing it without even raising its borrowing programme.
Now, the primary reason for cause of increasing fiscal deficit is subsidy burden. And fuel subsidy is one of them. So, the obvious way to conceal the actual deficit number is to manage fuel subsidies. In the past, the government resorted to rampant issuing of special securities called oil bonds to oil marketing companies (OMCs). This was to ensure that the burden does not reflect on its own balance sheet. Although the practice has been discontinued and the PSU oil companies are now paid in cash, the oil bonds still appear in the balance sheets of OMCs suggesting that Government still has a huge liability to take care of.
Further, seems like the practice of camouflaging subsidies is here to stay. It is not just oil bonds but several other 'special securities' that have helped the government book up the fiscal deficit number until recently. As per an article on Firstpost, currently special securities worth Rs 2 trillion are outstanding!
Rest assured that oil bonds are not the only culprits. Let us now look at how fertilizer subsidy is being managed through special arrangements. In order to fund fertilizer subsidies, the government makes an arrangement with PSU banks. These banks make payment to fertilizer companies for subsidies that are due. On a later date, government makes the payment to PSU banks. This effectively means that PSU banks are financing the fertilizer subsidy! Yet another example relating to off balance sheet funding.
We wonder what kind of arrangement government is likely to make in order to finance huge food subsidy burden post the enactment of the Food Security Bill.
It is therefore evident that the special securities have allowed the government to rein the deficit within its targeted number. Actual deficit though is much higher. Such arrangements may keep India's economic data temporarily healthy. But it is only a matter of time before our vulnerability becomes evident. Investors therefore have every reason to be circumspect of the veracity of economic data, both global and domestic, and keep their portfolio resilient to the worst case scenario.
Do you believe India's fiscal deficit numbers are authentic? Let me know your comments
Now, the primary reason for cause of increasing fiscal deficit is subsidy burden. And fuel subsidy is one of them. So, the obvious way to conceal the actual deficit number is to manage fuel subsidies. In the past, the government resorted to rampant issuing of special securities called oil bonds to oil marketing companies (OMCs). This was to ensure that the burden does not reflect on its own balance sheet. Although the practice has been discontinued and the PSU oil companies are now paid in cash, the oil bonds still appear in the balance sheets of OMCs suggesting that Government still has a huge liability to take care of.
Further, seems like the practice of camouflaging subsidies is here to stay. It is not just oil bonds but several other 'special securities' that have helped the government book up the fiscal deficit number until recently. As per an article on Firstpost, currently special securities worth Rs 2 trillion are outstanding!
Rest assured that oil bonds are not the only culprits. Let us now look at how fertilizer subsidy is being managed through special arrangements. In order to fund fertilizer subsidies, the government makes an arrangement with PSU banks. These banks make payment to fertilizer companies for subsidies that are due. On a later date, government makes the payment to PSU banks. This effectively means that PSU banks are financing the fertilizer subsidy! Yet another example relating to off balance sheet funding.
We wonder what kind of arrangement government is likely to make in order to finance huge food subsidy burden post the enactment of the Food Security Bill.
It is therefore evident that the special securities have allowed the government to rein the deficit within its targeted number. Actual deficit though is much higher. Such arrangements may keep India's economic data temporarily healthy. But it is only a matter of time before our vulnerability becomes evident. Investors therefore have every reason to be circumspect of the veracity of economic data, both global and domestic, and keep their portfolio resilient to the worst case scenario.
Do you believe India's fiscal deficit numbers are authentic? Let me know your comments
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