Telangana bungles budget & accounts 2016-17

The CAG has been very critical of the TS government's financial management and financial indiscipline. Against the TS government’s claim of surplus budget in the financial year 2016-17, the CAG report commented that the revenue surplus was overstated by Rs 6,778 crore on account of irregular accounting. Thus the state had a revenue deficit of Rs 5,392 crore in 2016-17. 

  

  

• The fiscal deficit of Rs 35,281 crore stood at 5.46% of GSDP was understated by Rs 2,500 crore due to crediting of borrowed funds as revenue receipts.
• The ratio of fiscal deficit to GSDP, excluding the amount transferred under UDAY scheme (Rs 7,500 crore), was 4.3% exceeding the ceiling of 3.5% stipulated for 2016-17 by the 14th FC  under FRBM legislation. 
• Under UDAY scheme, against Rs 8,931.51 crore borrowed through UDAY bonds during the year, the state government released Rs 7,500 crore only to Discoms at the end of the yearand has been booked under capital expenditure as equity. 
• The government utilised 34.74% of borrowed funds in 2016-17 for repaying its existing debt which increased by 18%. The CAG warned the state government that it will have to borrow further to repay its loans. 
• CAG said that the interest payments was 10.4% of revenue receipts against the normative rate of 8.22% prescribed by the 14th FC.
• The total debt in 2016-17 was Rs 1.21 lakh crore, which is 31% more than Rs 91,985 crore in the previous year. The state used 7.12% of its tax revenue to repay the debt in 2015-16, it had to allocate 32.16% of tax revenue for the same during 2016-17.
• The aim of Mission Kakatiya is to restore all 46,531 tanks in the state in five years. The restoration of 21,670 tanks by August 2017 was proposed; however, only 28% of them, 7901 tanks, were restored. The removal of silt is an important component of the restoration works. The state government said that farmers were not interested in taking the silt because it was not useful for agriculture. The CAG said that this was not acceptable as guidelines prescribed priority to be given to tanks where farmers agreed to transport silt. The restoration works are supposed to irrigate 10 lakh acres of gap ayacut. The CAG observed that there was no mention of the gap ayacut in the estimates for the individual works.

KCR of TRS has successfully converted Telangana, a revenue surplus state in 2014 (Rich state) into a revenue deficit state (Poor state) with his mindless borrowing and senseless spending and bring the state to the brink of debt trap (borrowing to pay old debts). In the process KCR and TS had violated all accounting norms, bypassed rules, bungled the books, FC rules ignored, FRBM limits violated. In these matters, KCR is neither the first nor the last. Most states and Centre violates norms and rules, at will, and doesn't really care for CAG reports. Corruption is the key element.

With most of its spending on non revenue generating projects, Telangana will sink into deep debt trap very soon. With most of its revenues going for debt servicing - education, health care and welfare will take severe hit. The debt will be shifted for as long as possible… but eventually, someone will have to come to terms with it. The black hole totals up to huge sums of money; no one can pay; and the system gets bankrupted, or services rendered become inadequate and farcical. The future is austere if this equation isn’t balanced out.

Notwithstanding tall development and financial management claims of the Gujarat state, the CAG's five audit reports on the last leg of Narendra Modi's rule as the Gujarat Chief Minister after a 12-year stint has fished out in all disputed transactions worth Rs 25,000 crore that points to fiscal profligacy and rising debt burden.

Read the CAG report dated July 2014

Why the fuss about Fiscal Deficit?

1. Budget deficit =      total expenditure – total receipts
2. Revenue deficit =   revenue expenditure – revenue receipts
3. Fiscal Deficit =       total expenditure – total receipts except borrowings
4. Primary Deficit =    Fiscal deficit- interest payments
5. Effective revenue Deficit = Revenue Deficit – grants for creation of capital assets
6. Monetized Fiscal Deficit =  part of the fiscal deficit covered by RBI borrowing

The Golden Rule of fiscal policy is that the government should borrow only to invest that benefits future generations and not to fund current spending, maintaining inter-generational equity. Hence, the best way is to spend the borrowed money is for projects like infrastructure. The policy suggestion is that government’s budget should have no revenue deficit, a situation where the government’s day to day earnings are not enough to finance its day to day activities.

• Overseas investors and rating agencies relies a lot on this number to judge the health of the country's economy.
• Fiscal Responsibility and Budget Management (FRBM) panel has recommended a fiscal deficit target of 2.5% of the GDP for fiscal 2022-23. The panel suggested 'escape clause' in case of over-riding consideration of national security, acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes. Also, "far-reaching structural reforms in the economy with unanticipated fiscal implications" too can trigger deviation, not exceeding 0.5%, from the targets.
• This forces the government to walk the tightrope every time the budget comes, as it also has to attend to social sector needs and create enough stimulants for the growth engines of the economy to keep running.
• Any slip on fiscal deficit discipline puts the government at risk of inviting the wrath of the global rating agencies, whose outlook often determines the volume of investment flows into the domestic economy and markets. 
• Any government's move to go for additional market borrowing will be seen as a ‘negative’ that could widen the fiscal deficit. 
• A small fiscal deficit is a good idea but the problem is when the deficit swells and becomes untenable. In a high fiscal deficit environment, government borrowing can crowd out* bank credit, thereby forestalling any chance of capex revival.
  *is the high level of public borrowings that reduces the borrowing opportunity of the private sector.
• Fiscal deficit is met through borrowing by the government from the open market at competitive rate of interest, which increases the overall interest rate in the economy. It also adds to the burden on the future generation violating the principle of inter-generational equity.
• Surging oil prices mean a higher import bill for India and that will translate into higher expenditure. The faltering tax receipts, which are yet to shake off the twin impact of the GST and demonetisation will also widen fiscal deficit.
• Share sale in PSUs is not easy with the market outlook not that promising, limiting the government’s ability to mop up much revenue from that avenue.
• Credit growth in the economy is burdened with huge NPA loads forcing banks remain extra cautious in extending credit to industry. 
• Some economists and industry veterans say there is nothing so sacrosanct about this 'fiscal deficit' number and the government can always relax it a bit and work on it later on. It would be unwise to cut back on government expenditure, only to contain fiscal deficit, as long as that extra expenditure of the government is for investment and not for consumption.
• Ex-RBI Governor Raghuram Rajan opposed the higher fiscal deficit view for stimulating economic growth citing the dismal scenario of the Brazilian economy. He warned that the enormous costs of becoming an unstable country far outweigh any small growth benefits that can be obtained through aggressive policies. 
• Higher inflation remains the biggest headwind in deficit dynamics. Retail inflation @ 5.21% in Dec 2017 was much above RBI’s comfort zone of 4%. RBI’s stand is that higher fiscal deficit will bring more inflation and may distort economic activities in general.
• This year, loans repayment & interest payouts will take up 32% of the centre’s earnings, pensions and subsidies 23%, state grants 23% and defence expenditure 16%. These repetitive expenses will effectively mop up 94% of the total budget receipts. That leaves little room for allocations to new ideas or schemes. Higher fiscal deficit indicates the fragile state of the Centre’s finances, and its control over interest, pension and subsidy expenses indicating extremely limited elbow room in deciding on its budget allocations. 
• The other problem with the expenditure pattern is that the bulk of the budget spending goes into consumption or maintenance expenses, with very little spent on creating new assets.

The analysis tells us that for government to be really able to launch bold new schemes or make a difference to citizens’ welfare, it needs to clean up its finances first — pare down debt, save on interest payouts, reduce pensions and subsidies and raise asset creation. It must also ensure that its receipts grow at a far faster pace than expenses in future, so that the debt can be paid down. Therefore, the success or failure of the annual budget exercise really has to be measured on the progress in these parameters over the years.


Govt breached fiscal deficit target of 3.2% (actual 3.5%) in the current year 2017-18, same as previous year. The budget for 2018-19 projected fiscal deficit target at 3.3% of GDP against the earlier target of 3%. The reason for breaching current year target is mainly due to demonetisation and GST resulting in lower revenues and higher expenditure. 2018-19 being an election year, the budget is not so conducive for higher revenues and govt populist expenses are likely to go uncontrolled. Rising NPAs are big drag on economy. Oil prices surge will result in lower GDP growth and higher inflation thus widening fiscal deficit. Modi has learnt in very hard way not to play gimmicks with economy with reckless adventures but people of India paid the price for no fault of theirs.