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ECONOMY:
FISCAL RESPONSIBILITY BILL
Working
On Fiscal Fitness
With the
bill introduced in Parliament, Finance Minister Sinha hopes to do what
none of his predecessors have: cap deficit and slash expenditure. Is he
shooting for the moon?
By
Rohit Saran
What
do overweight people do when they can't regulate their diet and are too
lazy to exercise? They go to health clinics. What does the Government
do when it can't resist populist spending and is too reluctant to downsize?
It makes a law to force itself to spend less. The five-page Fiscal Responsibility
and Budget Management Bill that the Government placed in the Lok Sabha
on December 20 is a unique blend of the unoriginal and the profound. It
says nothing new, and yet if it becomes a law it could change the political
economy of the country more than any other piece of legislation in recent
times. No wonder political parties across the ideological spectrum-from
the Congress to the Left-have declared support for the idea behind the
bill, even though doubts have been raised over its contents. Says Pranab
Mukherjee, Congress leader and former finance minister: "We favour
the idea of fixing a limit on deficit and borrowings even though we have
reservations about the provisions of the proposed bill."
Those with
even the slightest idea of the state of government finances will not be
surprised at the surface-level support to the bill. Interest paid on past
loans ate up over 50 per cent of the Central Government's total income
and 73 per cent of its tax revenues in 1999-2000. That year, government
borrowings breached the Rs 1,00,000-crore mark. By the end of 2000-01,
the total debt of the Central Government would top Rs 12,00,000 crore,
which would be about 60 per cent of India's national income. The bill
aims to stem the rot in government finances in a time-bound schedule (see
box). It foresees wiping out the revenue deficit (excess of current expenses
over current income) by 2006 and hammering down the fiscal deficit to
just 2 per cent of the country's national income.
With such
an acute fiscal sickness, what's the hitch in approving the medicine?
To begin with, the Government is both the patient and the doctor. That
poses two problems: How sincere is the Government in taking the medicine?
And how correct is the prescription? B.B. Bhattacharya, professor at Delhi's
Institute of Economic Growth, points out: "Twice in the past-first
in V.P. Singh's long-term fiscal policy of 1987 and then in the November
1992 undertaking to the IMF-the government committed to cut deficits to
specific levels. On both occasions it failed to keep its word." Adds
Bibek Debroy, economist and former consultant with the Finance Ministry:
"The problem is not legislative inadequacy, it is executive inaction."
But then,
the bill is not so much about a "what to do" law as it is about
a "how to do" law. Says Prithvi Raj Chavan, convenor of the
AICC's Policy Planning Cell: "The proposed law will give the government
something bigger than itself to attribute harsh and non-populist spending
cuts to." There are serious concerns on the bill's prescription as
well. A major lacuna that both politicians and economists find is that
the bill stops at telling how much deficit to cut and is silent on what
should be cut. Theoretically, deficit can either be reduced by raising
revenues or by cutting expenses. But since expenses-especially of the
unproductive variety-are the problem, the presumption is that deficit
reduction will primarily mean expenditure control. Since the bill sets
out only the quantity-and not the quality-of spending cut, the fear is
that the axe will fall on heads that can easily be cut but should not
be cut. Such as education and health.
That's exactly
what happened in 1993-94 when the Central government deficit was reined
in a bit by slashing social spending and investment. This year Maharashtra
is chopping spending on health and education by 27 per cent, even as the
state's wage bill continues to bloat and politicians persist with profligacy.
Says CPI General Secretary A.B. Bardhan: "If the past is anything
to go by, the government will cut what it shouldn't and will not cut what
it should. That will be counterproductive." Mukherjee would have
preferred the bill to outline the priority areas of spending cuts. Worst
of all, the bill places no binding on the government to meet its commitments.
It's also not clear how effective deficit control measures would be, even
if the bill were to be passed in its present form. The procedure proposed
is that every four months the Finance Ministry will table in Parliament
expenditure and income accounts with details of revenue shortfall, expenditure
over-runs along with remedial measures. The measures must be approved
by Parliament for the ministry to implement them. What if MPs do not agree
with the remedies or delay its clearance? Both are very likely scenarios.
Comments
P. Chidambaram, TMC leader and former finance minister: "The bill
lists out a series of non-binding objectives and all of its critical commitments
are watered down by provisos. It's an anaemic bill." For instance
the government can digress from deficit reduction schedule in case of
a calamity. It can also overshoot RBI borrowings target till 2003. A better
way for the Government, according to Chidambaram, would have been to take
advantage of Article 292 of the Constitution and set binding limits on
government borrowings with no provision for exceptions barring national
and financial emergency. A member country of the European Union could
lose its membership if its deficit exceeds 3 per cent of the GDP.
Then, of
course, there is the fundamental fear that political parties will never
allow such a bill to become a law and thus restrain their populist profligacy.
So the surface-level support may not result in parliamentary votes. Warns
CPI(M) leader Biplab Das Gupta: "Unless there is political will to
put the house in order, the bill will not succeed." The Left parties
will question the Government on its track record and test its political
will when the bill comes up for debate. Open to questioning will be schemes
like Antodaya launched recently. The Congress too will seek binding obligations
and ask for transparency in spending cuts.
The finance
minister, on his part, is hoping to stick to the targets set in the bill,
even if it is not cleared soon. That's what he told INDIA TODAY recently.
But that's a hope finance ministers hold out at the beginning of each
financial year-only to see it dashed by the year-end.
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