India Must Improve Transparency In Off-Budget Transactions, Says OECD

India must “improve transparency” in off-budget transactions and its contingent liabilities as the government deficit-to-GDP ratio has declined, but public spending programmes are being financed off the budget, the Organisation for Economic Co-operation and Development said in its Economic Survey of India.

“Contingent liabilities are looming,” the survey said, adding that setting up a fiscal council would help in monitoring progress on fiscal targets and bring transparency in the cost of public programs carried through off-budget financing, along with contingent liabilities of government-owned entities.

This comes after the government included extra budgetary resources, which comprise fully-serviced government bonds, in the budget estimates for 2019-20. This would alleviate some of the fears that the government is pushing certain kinds of spending to the books of public sector entities like the Food Corporation of India. EBRs have been budgeted at 0.7 percent of the GDP in financial year 2019-20. The target is to reduce the accretions to the EBR stock to zero in five years' time.

India's public debt-to-GDP ratio remains relatively high, the survey said. Although the central government deficit and state deficits have declined, off-budget financing has increased, it said.

Public sector borrowing needs have risen at close to 8 percent of GDP, according to OECD estimates, putting pressure on smaller companies' borrowing costs.

The government's aim of controlling its fiscal deficit to 3.3 percent of the GDP is a prudent stance despite the economic slowdown, the survey said. The record dividend transfer of Rs 1.23 lakh crore from the Reserve Bank of India will help in compensating lower-than-expected goods and services tax revenues and shortfall on account of the corporate tax cut, it said.

‘Accommodative' Monetary Policy

Inflation targeting by the RBI, along with lower oil prices and partial deregulation of the food market have brought down inflation below the 4 percent target, the survey said.

With inflation below the 4 percent target since August 2018, the RBI has cut repo rates to ease bank liquidity. The Monetary Policy Committee sees further room for monetary policy to remain accommodative, the survey said. “Given uncertainty around food price developments and sticky inflation expectations, these cuts should remain prudent.”

Monetary policy should remain accommodative as long as inflation is set to remain comfortably close to the target, the survey said. The MPC decision is due later in the day.

Although financial risks, particularly non-performing loans of public sector banks, have declined, soured loans still remain high, the survey said, adding that some non-banking financial companies suffer from an asset-liability mismatch, and need to be closely monitored.

India ‘A Growth Champion' Despite Slowdown

Growth has slowed since mid-2018 from a “hefty” pace, reflecting the sharp deceleration in private consumption, the survey said.

Changes in insurance regulations and liquidity stress in NBFCs have affected car sales, while the shutdown of one major airline and volatility in fuel prices have weighed on consumer confidence, it said. “Going forward, growth is projected to recover. Private investment will bounce back as capacity utilisation rises.”

India needs to take more steps to improve the health of the financial sector, OECD Chief Economist Laurence Boone told BloombergQuint in an interview.

OECD sees India's growth for financial year 2019-20 at 5.8 percent and 6.2 percent next year. The projections were made before GDP data for July-September were released that showed India grew at 4.5 percent—the slowest pace in more than six years. The RBI, too, cut India's growth forecast for the ongoing financial year to 5 percent from 6.1 percent earlier.

Speaking at the launch of the report, Chief Economic Adviser Krishnamurthy Subramanian said global economic growth is significantly low, which is having an impact on India as well.

“The global economy today is at one of its significantly low points... the current lull is particularly exasperated by a consistent attempt to downgrade the power of multilateralism,” Subramanian said.