How circumventing FRBM Act by BRS govt proved costly for Telangana’s finances

The measures taken by the BRS in open defiance of the Fiscal Responsibility and Budget Management Act weakened the state legislature as an institution eroding transparency and accountability.
How circumventing FRBM Act by BRS govt proved costly for Telangana’s finances
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‘Debt’ is the buzzword making rounds in India’s youngest state Telangana following the state’s third Legislative Assembly elections. The Congress won the polls dethroning the Bharat Rashtra Samithi (BRS) which led the government for two terms since state formation in 2014. Soon after coming to power, the Telangana Congress released a White Paper listing out how BRS had left Telangana with mounting debt.

The conversation around debt and Telangana’s economy, however, should include the Telangana Fiscal Responsibility and Budget Management (FRBM) Act, the norms of which the BRS subverted and flouted over a period of nine years when it was in power. The problem isn’t one of economics alone, as the measures taken by the BRS in open defiance of the FRBM Act has weakened the state legislature as an institution and caused erosion of transparency and accountability.

In their Swetha Patram (white paper), the Congress hinted at how the BRS’ amendment to the FRBM Act of 2005 played a significant role in incurring debt. The Act allowed among other things to allow for the fiscal deficit limit for 2020-21 to be increased from 3% of the GSDP to 5% of the Gross State Domestic Product (GSDP), the sum of all value, in monetary terms, added by industries within a state. 

It also allowed for annual incremental guarantees to be increased from 90% to 200% of the total revenue receipts of the previous year. In other words, the BRS-led state government could borrow significantly more money than they could have earlier. The decision by the BRS to amend the Act itself did not see any public scrutiny. However, economists TNM spoke to and a report by the Comptroller and Auditor General have shed light on the pitfalls of flouting FRBM norms and how transparency went for a toss after the amendment. 

How transparency took a hit 

“The FRBM norms aim to institute certain principles for management of public finances. The adequate disclosures are necessary for various institutions in the entire process. For instance, the central government gives permission for borrowings by states, which may be subject to certain criteria about debts and deficits. Lack of transparency may lead to authorisation for a higher than the permissible ceiling,” says  Saket Surya, Deputy Head of Research at PRS Legislative Research.

The most recently available report by India’s Comptroller and Auditor General (CAG) on Telangana’s state finances, published at the end of March 2021, pointed to how public finances were mismanaged because of a lack of disclosure. The BRS government failed to disclose sources, purpose and extent of their borrowings appropriately as part of its budget documents. By not doing so, the government’s ‘crucial socio-economic schemes/projects’ went beyond the oversight and control of the legislature. 

“The government’s unwillingness to fully disclose the off-budget borrowings/liabilities is a clear circumvention of FRBM norms which has the dual impact of diluting public financial management and legislative oversight,” the report stated. 

The BRS has been criticised for diluting the state legislature before. In November 2023, TNM found that a BRS MLA was given arbitrary power and significant control over how resources were to be distributed.

Along with off-budget borrowings, the BRS-led state government had also not included projections “in respect of balance between revenue receipts and revenue expenditure, use of capital receipts for generating productive assets and yearly pension liabilities in its Medium Term Fiscal Policy Statement,” the CAG report noted.

When questioned about the lack of transparency, the government stated in January 2022, that off-budget borrowings have been used for development activities and generally for incurring capital expenditure alone. The CAG argued that as per FRBM norms, this reply is not acceptable, as disclosure of all such borrowings are to be made. Further, the 15th Finance Commission also opined that there is a need to make full disclosure of such extra-budgetary borrowings.

“Consistent use of such practices may lead to distortions in tax policy and expenditure priorities for servicing of debt that were accrued without adequate oversight,” Surya added. 

The Debt question 

Four days before Telangana public voted for its third state government, Congress president Mallikarjun Kharge alleged that the BRS chief K Chandrashekar Rao (KCR) had turned the revenue-surplus Telangana into a debt ridden state. The White Paper brought out by the Congress said the state’s fiscal deficit as a percentage of the GSDP averaged 3.7% in the period FY 2014-22 and did not meet the FRBM norms for three out of the eight years. 

Further, the CAG report on state finances noted that Telangana could not achieve any of the three fiscal targets and had registered a massive revenue deficit. The CAG report also argued that considering the BRS government’s massive off-budget borrowings, the debt-GSDP ratio would rise (at that point) to 38.10%. While the off-budget borrowings aren’t a part of the Finance Accounts, they are chronicled in the Medium Term Fiscal Policy statement – an important component of the FRBM Act. 

“The borrowings are a lot higher than targets fixed by the 15th Finance Commission and by the Telangana government itself in its Medium Term Fiscal Policy Statement,” read the report. By the end of March 2021 alone, Telangana government’s off budget borrowings come to Rs 97,940.45 crore. 

In a Government Order (GO Ms No 446), the erstwhile Andhra Pradesh government stipulated that the administrative departments in Secretariat and heads of Departments shall evaluate the fiscal risk and classify the Guarantees as: direct liability (100 percent risk), high risk (75 percent), medium risk (50 percent), low risk (25 percent) and very low risk (5 percent). The classification is based on factors like (i) debt servicing through government support, (ii) repayment schedules, (iii) financial performance of the entity, (iv) primary security, (v) valuation of assets and (vi) statutory liabilities prior to government guaranteed debt.

“The Telangana Finance Department did not provide any evidence regarding the risk-evaluation or analysis of financial performance of entities conducted by state departments in its statement on Fiscal Policy; another important component of the FRBM Act,” the CAG noted while commenting that the risk assessment was ‘not done methodically’. 

During the year 2020-21, the Telangana government provided Rs 9,331.29 crore out of budget towards the repayment of principal and payment of interest. The State Finances Audit report noted that the Telangana government showed these amounts as ‘loans’ and reflected them as ‘assets’ indicating that the PSUs have no obligation to repay loans to the government. The CAG report raised concerns that by doing this, the government was in essence not truthfully reporting on off-budget borrowings. 

“By registering interest/principal repayment of off-budget borrowings as loans extended to PSUs, the state government showed them as assets. This is similar to how loans are assets on the books of a bank. Thus, the net effect of an actual expenditure obligation of the state government is shown as its asset. Its revenue expenditure, committed expenditure (interest payment), and capital expenditure (principal repayment component) are underreported, whereas assets would be shown higher than they actually are,” remarks Surya. 

The CAG report also noted that many of the institutions do not have revenue resources to repay the loans provided by the government including the Kaleshwaram Project which would hardly generate any revenue as water for irrigation was provided at nominal rates. “Similarly, Telangana State Sheep and Goat Development Cooperative Federation Limited did not have any definite stream of revenue resource of its own and was, in fact, implementing a government subsidy scheme,” said the report. 

The Government would have to shoulder the liability of repayment of loans taken by these institutions, which are unable to generate enough resources for servicing the debts. 

“Two issues exist with the servicing of debt taken by such institutions. One, the debt was taken out of budget, otherwise, it may have violated FRBM norms for that year and hence, evaded legislative and public oversight.  Second, it raises questions about the quality of expenditure - public money was spent towards creating an asset which may not provide direct economic returns adequately.  If it were from the budget, it would have led to deliberations about the need for spending and models for financing. The government may have undertaken this model of raising funds to bypass FRBM limits for undertaking spending and avoid legislative scrutiny around the budget,” explains Surya. 

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