The government has come out with a dispensation aggregating to Rs 21,942 crore to the oil marketing companies to partly compensate them.
Close on the heels of the issue of special bonds worth Rs 6,000 crore to the fertiliser companies, the government has come out with a similar dispensation aggregating to Rs 21,942 crore to the oil marketing companies to partly compensate them for under-recoveries in selling key petroleum products at subsidised prices.
In all, bonds under these two heads alone have accounted for as much as Rs 85,942 crore by way of off-budget liabilities thus far.
Before the current fiscal year runs out, more of the same may be in the offing —- especially in regard to oil bonds, if the oil refiners are to emerge in the black — so that we may reach a paradoxical situation of the off-budget liabilities approximating to the explicitly stated fiscal number for 2008-09 which is Rs 133,287 crore.
Already, the “bond burden” under these two heads alone had reached 1.6% of the GDP, sharply up from 0.4% for 2007-08.
This is, of course, assuming that the budgetary projection of 13% jump in nominal GDP at market prices is intact; in view of the economic slowdown, a slippage in the rate of overall growth is probable and with a shrinking base, the off-budget liability —- GDP ratio may end up even higher than 1.6%, as is almost certain in the case of the fiscal deficit due to the stimulus package and other expenditures like the farm debt waiver, revised pay for staff etc.
In the event, we must brace for the fiscal deficit for this year, including the off-budget liabilities, in the vicinity of 8%, as envisaged by the Prime Minister’s Economic Advisory Council, but with an upward bias.
Clearly, the Centre is resorting to bond issues of this kind with a reckless abandon. Compared with Rs 18,757 crore in 2007-08, there has been a more than four-fold increase during the on-going fiscal.
In the case of oil bonds, the amount has leapfrogged from Rs 11,257 crore to Rs 65,942 crore and fertiliser bonds from Rs 75,00 crore to Rs 20,000 crore.
With the recent cut in the prices of diesel, petrol and cooking gas and a hardening trend in the crude prices, the financials of the petroleum companies are likely to come under pressure as also the compulsion on them to show a profit for the year as a whole.
Seen in context, a further tranche of oil bonds is on the anvil and the government may seek approval from Parliament in the session that is round the corner.
The Centre may have solved the problem faced by the oil and fertiliser companies by this expediency. But, without resolving the underlying issues —- right pricing and a leash on subsidy — such temporising is fraught with peril to the fisc.
Since no such frontal attack on the issue is on the horizon, the next year may see a greater deterioration of the Union finances than what is admittedly a dire predicament it is in right now.
In a sense, the use of the term, non-budget liabilities to these bonds is a misnomer. Though there is no cash outgo, they do entail a cost.
The repayment of the principal is deferred to the year of redemption so that at certain point in the future, the budget must factor in this outgo by making a provision for it.
This stratagem is also not “fiscally neutral” in that the interest payment falls due with immediate effect.
Therefore, year after year, the interest outgo is bound to burgeon, thus bloating up the revenue deficit and hence, the fiscal deficit as well, as the government would be labouring under a compulsion to borrow more to meet the interest liability.
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