The document discusses the state of India's public finances, including rising government debt levels and non-performing assets in public sector banks. Some key points: - Government revenue deficits have averaged 40% of gross revenues each year from 2007-2015, despite expenditure growing faster than revenues. High inflation eroded the value of revenues. - Interest payments, personnel costs, and establishment expenses account for 80-85% of government budgets, leaving only 15-20% for development. Rising debt levels could reach unsustainable levels in the next 5-10 years if trends continue. - Non-performing assets in public sector banks have risen three-fold in recent years, with an estimated Rs. 20 lakh

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State of Our Nation’s Finances
Shantanu Basu
The rapidly growing indebtedness of governments and mounting non-performing assets of
banks, mostly in the public sector, both of which strike at the heart of financial administration
of this country, and include our legitimate personal finances as well, are of the highest
concern. In seven successive fiscals till 2014-15, governments, state and central,
cumulatively expended Rs. 1.72 lakh crore while earning revenues of Rs. 1.23 lakh crore,
leaving a revenue deficit of Rs. 0.49 lakh crore, i.e. 40% of gross revenues on an average
each year. While expenditure grew, only in absolute terms, by a factor of 2.33, revenues
increased by a factor of 2.54. Yet the revenue deficit multiplied by a factor of 1.87. Why did
this paradox arise?
The inflation rate in India averaged 7.38% in 2012-16, reaching an all-time high of 12.17% in
Nov. 2013 and a record low of 3.27% in Nov. 2014. This had an invariable effect on
government spending. Although revenues rose by an average of about 25% each in seven
fiscals in absolute terms, yet relatively high inflation and rampant waste and leakages
massively reduced the value of every Rupee governments earned and spent. Social and
community services accounted for about Rs. 2.88 lakh crore or approx. Rs. 2400 per head of
India’s 1.20 billion populations in 2007-08. Reduced to 1990-91 prices, the real annual
expenditure declines to about Rs. 1.34 lakh crore or Rs.1160 per head or Rs. 3 per day. If this
were further conservatively reduced by 35% for leakage & wastage and 8% to a conservative
inflation rate, the per capita development expenditure outlay collapses to barely Rs. 661 per
annum or a ludicrous Rs. 2 per day. Today when lentils retail for over Rs. 100 or sugar at Rs.
50 a kilogram, the cost of government is almost the same as that of governance
(development). It is therefore not as if there was any dramatic rise in government revenues
and spending over the last several decades, notwithstanding substantial media publicity.
Today, the Indian Rupee is worth less than a third of what it was in 1947 at a simple
compounded average of 3% per annum.
Historically Governments have tried to make their ends meet via generation of internal
revenue and resorted to deficit financing by market loans, small savings, provident funds,
special treasury bills, overseas multilateral and bilateral borrowings, etc. All these
instruments carry rates of interest that vary from 5-11% per annum that must be mandatorily
discharged. Non-tax revenues such as dividends and share of profits of state-owned utilities
and companies have not risen commensurate with the giant cumulative state investment in
them. Forty seven CPSUs accounted for about 13.50% of total market capitalization as on
Jan. 31, 2017. Not surprisingly, the capital-intensive monopolistic ONGC’s BSE share price
at Rs. 202.15 compared unfavourably with ITC’s Rs. 258.05 and Infosys’s at Rs. 929.30 per
share. Likewise, SBI’s Rs. 260 share compares unfavourably with HDFC Bank’s Rs.
1,286.95, on the same date. Few CPSUs & PSBs turned in profits that too owed to
monopolistic control of the market, e.g. petroleum and telecom. Most others lived off grants
and unending loans from the public exchequer with many having eaten away their net worth
several times over. Of course, such non-performance and habitual indebtedness was not
entirely the making of an entity's management, rather imposed upon them partly by
successive governments and dynamics of the economic environment. Yet professional
stewardship of these entities has seldom been questioned.
Simultaneously, whatever revenues were raised, lost a significant portion to sustaining
unsustainable PSUs/Autonomous bodies, foundation-stone projects by the thousands,

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unremunerative politically-motivated projects, write-down/waiver of loans advanced to
various entities, rampant delays in completion of public projects, private and public and a
giveaway culture of subsidies without much accountability. In fine, rising indebtedness has
therefore not translated, into the extent of on-ground development that should have happened.
Today the public exchequer is caught in a giant cleft, viz. the giant demands of development
versus availability of public finance, with the gap substantially widening every year and
causing an almost unbridgeable chasm to emerge in popular demand and their realization.
In 2014-15, the revenue deficit of the Govt. of India was Rs. 8.85 lakh crore. To cover this
deficit, the Govt. of India resorted to market borrowings of Rs. 6.82 lakh crore. As on Jan. 1,
2016, the public debt of the Govt. of India stood at a whopping Rs. 64.95 lakh crore. The
states accounted for another Rs. 143.23 lakh crore making a total of about Rs. 208 lakh crore.
At a conservative 7% interest rate and assuming 50% retired debt reduced by the amount of
state govt. debt annually, this could translate to a crippling Rs. 8-10 lakh crore in 2017-18
and eat away 40-42% of the total expenditure budget of all govts., provided states succeed in
retiring 50% of their previous debts during the year.
In addition, 30% of all non-development expenditure goes into salaries, establishment &
pensions. However, there is a caveat here. There are several lakh personnel - regular, casual,
temporary and contract - whose salaries and establishment costs are met from development
budget allocations like the cost of a field agricultural extension officer, his staff vehicle,
assistants, office expenses, mobile labs and computers, etc. In effect, interest, personnel and
establishment costs alone account for 80-85% of the full budget of governments in India,
leaving a paltry 15-20% for development on the ground. Leakages such as the recent fraud in
Assam of Rs. 2250 crores on nearly 150 ghost Anganwadis (creches) that were fraudulently
funded for Rs. 250 crore/annum for close to a decade, plague agriculture, energy, public
health, medical services and irrigation, reducing the money value of limited finances of
governments further and reduce development to fodder for electoral campaigns alone.
Where such borrowing and expenditure cause appreciable rise in GDP and capital formation
(hence income levels), budget deficits are seemingly justified even with relatively high
inflation at the initial stages, such as in Japan that reported an estimated 7.01% deficit in
2016. Attempts to peg the deficit artificially to low levels in a bid to curb inflation, is likely to
damage capital formation, as little else changes in the pattern of non-development (revenue)
expenditure, and low rise or even fall in GDP and capital formation could happen. This also
often leads to camouflaging non-developmental expenditure in the development category. In
the end, governments that borrow but disproportionately devote such funds to revenue
expenditure that have no return on investment, often run up high levels of debt. Owing to
excessive revenue expenditure, borrowing for capital items like roads, bridges, etc. becomes
inevitable. Every day of delay in commissioning projects runs a high potential of driving
governments to unsustainable indebtedness and default, as happened in Greece.
Unfortunately, India is gradually progressing into a cusp of indebtedness that hovered around
the 50% of GDP barrier in 2015-16. However, rising market borrowing, a large part of which
is diverted to revenue expenditure could adversely raise this ratio in the next 5-10 years to
unsustainable levels.
Media reports show that the default on commercial borrowings by the infrastructure sector is
alarming. While lenders are reticent to lend afresh, rising investigations and raids may be
additional major dampeners. What is worse is that cash surpluses available with the private
sector are not forthcoming owing to uncertainties in acquisition of land, revenue-sharing and
tolls, etc. In 2007, the India Infrastructure Report stated that India required about $320 billion
in 2007-12 to repair and add to its physical infrastructure. Similar moneys were required for

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capacity enhancement of our energy sector to meet a 55 billion unit energy shortage in 2006-
07. Therefore brakes such as the 3% deficit of GDP in Fiscal Responsibility & Budget
Management Acts may prove counterproductive unless sustainable and credible restrictive
corresponding steps are taken to curb government spending on its establishment and
personnel and severely curb rampant leakages while breaching the target deficit.
In 2014-15, there was a divestment bonanza that reduced market borrowings by govts. by
only about 6%. Although the lease of spectrum garnered about Rs. 50000 crore plus some
more in coal mine auctions, the revenues on these accounts were not substantial to
appreciably reduce market borrowings. The single major reason is that license fees become
payable in specified percentages every year over the long-term lease period (10-30 years) that
does not make much major positive impact in annual budgets that run into several lakh crore
Rupees each year. The overweening obsession for revenue generation, post-2G CAG telecom
report, has caused spectrum leases and FM radio licenses to net just about 10% of the
estimated amount, leaving a gaping hole of about Rs. 6.50 lakh crore in the Govt. of India’s
budget estimates. The 300% explosion in splitting Ministries/Depts. since 1947 has not
caused much appreciable improvement in governance and accountability either. Instead, it
has diffused responsibility vastly and slowed down decision-making. Unending command,
control and coordination chains have also had the undesired effect of enhancing rent-seeking
across levels, apart from rampant delays. Costs of administration have thus hardly kept pace
with revenues. Even assuming that Rs. 6.50 lakh crore were obtained, how much would have
gone to real sustainable development remains debatable.
There is pronounced political reticence to taxation and enforcement. Governments lose
several thousand crore each year owing to collusion between revenue officers and assessees.
There is very limited reconciliation of revenues between revenue collection agencies, their
accounts officers and receiving banks. CAG’s customs audit report for 2015-16 reports in 89
indirect tax commissionerates a gross amount of Rs. 6.20 lakh crore remained unreconciled.
Even if a single percent of revenue were not paid at all or showed as having been paid (using
forged bank stamps and pay-in forms), this would amount to a whopping Rs. 6200 crore,
enough for about 2.43 lakh jobs paying Rs. 20000 per month and bringing 4-5 times that
many people well above the poverty line. Owing to the cash basis of govt. accounting, the
quantum of revenue lost by lack of enforcement owing to their own ranks never figures in the
annual accounts. As if this were not enough, extortion at toll gates, takes its own toll as
legitimate revenues of the state are converted into private wealth and then applied to various
purpose, mostly illicit. Tax demand notices likewise are often inspired and adjudication often
ends up costing more than the settlement terms. All these while govts. live off borrowed
moneys.
While low global oil, commodity and shipping prices allowed the Govt. of India the luxury of
raising central excise on imported oil, 2016-17 and onward is seeing a rise to $60
dollar/barrel levels. This would invariably reduce the Govt. of India’s fund-raising capacity.
Cesses are not ad hoc substitutes for revenue collection by manufacturing that shows few
discernible signs of revival. Cesses collected over the years that ought to run into several lakh
crore, notably on education, are nowhere manifest in our educational institutions while state
spending steadily declines in this sector, as in many others. Govts. in India no longer have the
financial muscle to enhance spending much more nor incentivise consumer spending by tax
rebates notwithstanding political grandstanding. What then of alternative financing from
India’s financial institutions (FI)?
Defaulted dues are of type broad types, viz. non-performing assets (NPAs) and restructured
debts (CDRs). When a loanee fails to pay back principal and interest when instalments are

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due, nor is there any prospect of their business being revived by FI intervention, is declared
an NPA. On the other hand, CDRs are attempted bailouts by loaning FIs by extension of time
(e.g. owing to adverse business scenario, sudden change in state policies, etc.), conversion of
debt into equity or by management participation of the loanee entity. Over the years, PSBs
have suppressed their actual NPAs by the subterfuge of sanctioning many more loans than
those defaulted. CDRs partly supplemented PSB efforts by staggering declaration of NPAs in
misrepresentative but audited PSB balance sheets. GNPAs of PSBs in the last five fiscals rose
three-fold. As of Dec. 31, 2016, of every Rs. 100 loaned by PSBs, Rs. 11 is in default. These
figures do not include NPAs en route in the form of CDRs that may multiply this figure
alarmingly given the steadily worsening domestic and global economic scenario.
Recently, a former Dy. Governor of the RBI, Dr KC Chakrabarty, recently said that he
estimated that NPAs, as on date, were about Rs. 20 lakh crore. Obviously, this figure could
stretch into an unknown abyss and did not include historical loan waivers over the last 2-3
decades. Some PSBs like IOB & UCO Bank have GNPA in the range of 17-23%. For IOB,
gross bad loans are more than 2.5 times its net worth; both UCO Bank and United Bank of
India have eroded their net worth by at least double while IDBI Bank is 1.3 times negative in
its net worth. These worrisome figures also do not include loans given to projects where the
dates of commencement of commercial operations had passed but the projects had failed to
take off, presumably mostly in the infrastructure and telecom sectors.
At the same time, international conventions demand a minimum percentage of liquidity that
banks must maintain viz. Basel-III. Although PSBs currently comply with these norms, a
rapid rise in NPAs in the coming months, matched by poor recovery record, could cause them
to fall below these stipulations. The Indradhanush plan of the Dept. of Financial Services,
Ministry of Finance of Aug. 14, 2015 estimated the extra capital requirement up to 2019-20
at about Rs.1.80 lakh crore. This estimate was based on credit growth rate of 12% for the
current year and 12 to 15% for the next three years depending on the size of the bank and
their growth ability. It was also presumed that the emphasis on PSBs financing would reduce
over the years by development of vibrant corporate debt market and by greater participation
of Private Sector Banks. Accordingly, budget provision of Rs. 25000 crore each in 2015-16
and 2016-17 and Rs. 10000 crore each in 2017-18 and 2018-19 was proposed in Budget
2016-17. Owing to revenue shortfalls and rising revenue expenditure, the full amount has not
been paid in most fiscal years. This tendency would only be exacerbated in 2017-18 and
onward. Obviously, such ad hoc allocations for recapping PSBs take away development
funds from the public exchequer and are not a sustainable solution. Further, ever-rising NPAs
cast a shadow on the Dept. of Financial Services’ estimates of Rs. 1.80 lakh crore required
for recapping PSBs.
At the same time, Budget 2017-18 proposed the creation of a Distressed Assets Agency
(DAA) to which distressed loans of PSBs would be transferred and that would look for
buyers for them. Although the fine print on financial arrangements for DAA is not yet in the
public domain, there are grave doubts about Govt. of India’s ability to bankroll the share
capital for such entity. It is useful to remember that the collapse of Lehmann Brothers in
2008-09 in the US owed to its taking over distressed housing assets from Wall Street banks
and then not being able to sell them, although pay-outs for such takeovers were met by Wall
Street banks, acting individually or in consortium mode. A similar situation could happen if,
for instance, builders were to attempt to sell apartments and commercial buildings in the
ghost towns on the Greater Noida Expressway since the sale value would be appreciably
lower (maybe 40-60%) than what is owed to financing agencies, a very likely event. Even if
they refinanced their defaulted loans with fresh lower-interest ones from PSBs (after recent
interest rate cuts), no real accretion to infrastructure development would occur while the

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option of further default remains omnipresent. PSBs, now increasingly, under close watch of
vigilance and investigative agencies, are also loath to loan further funds.
With such huge pressure building on it, Govt. of India is left with very few options.
Accordingly, over the last year or so, relatively healthy CPSUs are mandated to return a
minimum 30% of their net profits to Govt. of India as dividend. With looming wage
revisions, many CPSUs that are holding companies are now resorting to milking their
subsidiaries for their cash balance to pay off dividend to the Govt. of India. For others whose
profits are recession-hit or minimal, the choice is to dip into their reserves. Recently, the
Ministry of Railways reportedly protested to the Finance Ministry against the latter’s demand
for transfer of Rs. 850 crore dividend earned by 14 Railway CPSUs after the merger of the
Rail and General Budgets in 2017-18, stating that such transfer would only add to the
shortfall in railway earnings. Compounding these is RBI’s recent decision to cut back its
dividend to 12% in order to absorb costs of printing new post-DeMo currency.
Govt. of India, mainly via its FIs, also owns large chunks of shares of the private corporate
sector. Companies/FIs like ITC (34.43%), ACC (14.66%), Axis Bank, L&T (45%), Bharti
Airtel, Gammon India (63.4%), Monnet Ispat (50.14%) and Tata Steel (19.66%) have several
lakh crore Rupees of govt. investment in them. Faced with an unenviable situation, the govt.
has now started divesting part of such holdings, some open market, and the rest being picked
up state FIs like LIC. Many relatively healthy CPSUs have also been coaxed in the last year
into buying back govt. shares that has reduced their liquidity further, at least till their next
IPO. Given the less than average performance of the stock market, offloading shares of
CPSUs is unlikely to garner huge resources, even when govt. has recently listed its four
general insurance companies. With President Trump promising large public-private sector
investments in America’s crumbling infrastructure, interest rates would invariably rise and
cause FDI to flow back from India to the safer confines of the US that may depress Indian
bourses even more, and, with it CPSU divestment offerings.
The layman understands that unless consumer incomes rise (with employment), demand will
remain depressed. In turn, this will depress manufacturing and along with it, supporting
services. Momentary spikes in GDP from increased revenue collection owing to extraneous
reasons are not much cause for optimism. A stasis has emerged in which all expecting fingers
are pointed toward govts. that do not have large-scale spending wherewithal any longer and
must rely on increasing borrowing. Stop-gap measures like the ones stated in the preceding
two paragraphs eat into the nation’s cash reserves, particularly when ploughed into revenue
expenditure and uncertain public projects. The Union Finance Minister’s job has never been
as unenviable, even in 1989-90.
The author is a senior public policy analyst and commentator