Faced with the impending reality of a general election and the difficulty in adhering to fiscal targets to avert a global credit rating downgrade, the Centre has come up with a familiar ‘solution’: window-dressing. Last week, it announced a Rs 7,200-crore package to enable sugar mills to clear cane payment arrears to farmers. However, this money — equal to their total excise liability over the last three sugar seasons — will not be disbursed through the exchequer. It will, instead, be lent out by banks. The Centre has promised to meet the interest burden of up to 12 per cent on these loans. It is a stratagem that leaves almost everyone happy. The Centre gets to earn brownie points for ensuring discharge of growers’ dues without ostensibly incurring much fiscal cost; the banks earn 12 per cent on loans that are backed by Central guarantee; and it hardly needs to be explained why the mills and the farmers aren’t unhappy.

A similar approach has been adopted for fertiliser. The Union Budget for the current fiscal had allocated Rs 65,971.53 crore towards fertiliser subsidy. This amount is already exhausted thanks to the policy of keeping urea prices unchanged and forcing companies to reduce farmgate prices of even ‘decontrolled’ non-urea fertilisers. But rather than providing for additional subsidy via supplementary demand for grants, the Centre has got banks to extend 60-day bridge loans to the cash-strapped industry. It has agreed to bear 8 per cent of the total 10.7 per cent interest cost on these loans to firms against future subsidy receivables. Until now, a sum of Rs 15,500 crore has been approved under this ‘special banking arrangement’. Just as in sugar, this stratagem will impose no explicit fiscal costs, apart from the interest subvention on the monies borrowed by the companies.

Such schemes may seem like an effective way of addressing the challenges posed by politics (Narendra Modi) and rating agencies (Moody’s). But at the end of the day, such expediency, which is essentially an attempt to window-dress accounts, will not convince anybody. In the past, the Centre had issued special bonds in lieu of paying subsidy in cash to fertiliser firms, oil marketing companies and the Food Corporation of India. In his 2010-11 Budget speech, former finance minister Pranab Mukherjee had promised to stop issuing such bonds and bring “all subsidy related liabilities (directly) into our fiscal accounting”. The current Finance Minister could do well to honour the spirit of this commitment and refrain from replacing bonds with ‘special banking arrangements’. Postponing payment obligations is hardly the way to address fiscal problems.

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