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KAUTILYA
New
Set of Fiscal Rules
Legislation to introduce fiscal responsibility at the Centre
is tabled
By
Jairam Ramesh
The
Government introduced The Fiscal Responsibility and Budget Management
Bill, 2000 just before Parliament adjourned on December 20. This is a
major step forward, although just five days later the prime minister,
defying the Finance Ministry and the Planning Commission, made a complete
mockery of the bill by grandiloquently announcing three new schemes.
The bill
commits the Central government to:
- a fiscal
deficit of 2 per cent of GDP by 2006, from the 5.1 per cent of GDP budgeted
for 2000-01.
- a revenue
deficit of zero by 2006, from the 3.6 per cent of GDP budgeted for 2000-01.
- total
internal and external liabilities at 50 per cent of GDP by 2011, from
the present level of about 56 per cent of GDP.
- prohibition
of borrowings by the Central government from the RBI after 2004 except
under special well-defined circumstances.
- expenditure
cuts whenever there is a shortfall of revenue or excess of expenditure.
 Interestingly,
Article 292 of the Constitution already provides for fiscal austerity.
In the Constituent Assembly debates, Babasaheb Ambedkar had occasion to
remark, "... I even concede that there might be an Annual Debt Act
made by Parliament prescribing or limiting the power of the executive
as to how much they can borrow within that year." Hopefully, our
MPs will ensure the passage of this bill by April-May 2001. Indeed, if
the Government is serious, why not issue an ordinance straightaway and
have that ratified later.
Our economic
malaise arises from the fact that the revenue deficit comprises the bulk
of the fiscal deficit-up from two-fifths to two-thirds over the past decade.
The revenue deficit is simply the difference between revenue receipts
and revenue expenditure. A revenue deficit means that we are not living
within our means and are borrowing to meet daily consumption needs. However,
one caveat is important here. Spending in vital sectors like education,
health and rural development is classified as "revenue" expenditure.
This has to actually increase. It is the other "non-productive"
segment of revenue expenditure, comprising subsidies, interest payments,
defence and establishment costs, that needs to be controlled. This segment
now constitutes about 70 per cent of revenue expenditure.
The fiscal
deficit is the difference between total receipts (revenue plus recovery
of loans) and total expenditure. This is a comprehensive measure of the
government's borrowings from all sources. As the scholarly former RBI
governor C. Rangarajan points out in his new collection of speeches, Perspectives
on Indian Economy, if you have a household financial savings rate of around
10 per cent of GDP and a fiscal deficit of around 9-10 per cent of GDP
for the country as a whole, it means that almost the entire pool of financial
savings is being appropriated by the public sector broadly defined. Upward
pressure on interest rates, and thereby a downward push on investment
rates, is then inevitable. The single most important task before the country
is to increase the rate of public and private investment in industry,
agriculture and physical and social infrastructure. That will just not
happen with the present structure of public expenditure, both at the Centre
and in states.
Countries
like the US, Germany, New Zealand, Canada, Brazil and Argentina have the
balanced budget rule-revenues and expenditures have to balance annually.
The European Union has a debt ceiling rule which places a limit on the
stock of public debt as a proportion of national income. A third type
of rule is the borrowing rule that places a limit on government's borrowing
from its central bank. Such rules have delivered unprecedented prosperity
in countries like the US but in other instances like Brazil and Argentina,
have been unable to stem economic disasters. East Asia practised fiscal
prudence without legislation. Having legislation is one thing, having
the desired outcome is quite another. Would the country have been saved
from the Fifth Pay Commission disaster in 1997 had such legislation been
there? Certainly not.
Implicit
in the bill is tight expenditure control. However, we also have a revenue
problem. Gross tax revenues of the Central government have declined from
10.8 per cent of GDP to slightly over 9 per cent now. Better tax administration
and expansion of the tax base itself will be needed to reverse this trend.
Rules on revenue management must go hand-in-hand with rules on expenditure
management. To this extent, the present bill is incomplete. Also, in our
federal set-up, fiscal management has to be a continuing joint venture
between the Centre and the states. As a starter, the states will need
to enact similar legislation and be in sync with what the Centre is doing.
(The
author is with the Congress party. These are his personal views.)
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