Why in news?
Funds with the National Small Savings Fund (NSSF) will now be used to help the struggling state-owned airline, Air India.
What is the decision?
- Reportedly, an estimated Rs 10 billion is to be allocated to the airline.
- Air India recently failed to pay salaries and also missed payments to various creditors.
- These include oil companies, aircraft leasing agencies and mechanical contractors.
- It already has a debt of over Rs 500 billion and the government’s efforts to privatise it have not materialised.
What is the government's rationale?
- The government wants to keep the liabilities like funding an ailing airline off the Budget balance sheet.
- It is also focussed at meeting the fiscal deficit target.
- Recently, the government also permitted the NSSF to start lending to central agencies in addition to Air India.
- E.g. the Food Corporation of India and the National Highways Authority of India
- For the current financial year, the NSSF plans to invest Rs 1.3 trillion in these and other agencies.
- Notably, these are areas that would otherwise have required budgetary support.
- In other words, instead of the government directly lending to these agencies, it will have the NSSF directly lend to them.
- The impact on the overall public sector balance sheet will in effect be the same but the fiscal deficit will appear smaller.
Is it justifiable?
- The pool of small savings being used to finance a struggling airline’s working capital raises some concerns.
- Certainly, this is not tax revenue and the government is just the custodian of this money.
- The government thus has the duty to ensure that this money is invested safely and wisely.
- So the decision largely appears to be an irresponsible use of funds.
- Even the fiscal deficit target would only be met in name.
- It's because the government would still be spending more in excess of its revenue than it had targeted.
- The effect on private sector borrowing would largely be the same as additional crowding out would occur.
What are the concerns?
- The government seeks to meet its disinvestment target through buyback of shares by public sector undertakings (PSUs).
- There is also a suggestion that the RBI reserves be tapped for government expenditure.
- These make it clear that the government is relying heavily on sources other than taxes to fund its spending.
- This is problematic for two reasons:
- it is often a less productive use of the funds in question and involves a violation of fiduciary duties
- using such off-balance sheet methods undermines the effort towards fiscal consolidation
- The finance ministry must thus reconsider its approach towards managing the financial resources and meeting the targets.
Source: Business Standard