The Hindu Business Line : Making government's accounts as intelligible as a merchant's books

AFTER the usual intro and rededication to the `seven clear economic objectives' of the National Common Minimum Programme, where the Finance Minister talked of the need to `shift gears', the first point that came up in his 2004 Budget speech was `FRBM and the macroeconomic backdrop'. As a result, `assault on poverty and unemployment' got shifted further down.

The abbreviation FRBM stands for the Fiscal Responsibility and Budget Management Act, 2003, notified only days before the new government's first Budget in 2004. But why FRBM? The Preamble to the legislation speaks of the need "To provide for the responsibility of the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economic stability by achieving sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government and conducting fiscal policy in a medium-term framework and for matters connected therewith or incidental thereto."

In short, the Act streamlined the Budget presentation process by making the Government accountable for fiscal performance. And, for the first time, Budget 2004 carried fiscal policy statements for `medium-term' and also `strategy', along with one on `macroeconomic framework'.

There are a few useful definitions in the FRBM Act. `Fiscal deficit' is the excess of total disbursements, from the Consolidated Fund of India, excluding repayment of debt, over total receipts into the Fund (excluding the debt receipts), during a financial year.

Put simply, fiscal deficit is what the Government has to borrow to fully meet its expenditure. Unchecked fiscal deficit can cause debt to mount, and interest burden to gobble up revenues.

`Revenue deficit' means the difference between revenue expenditure and revenue receipts, which indicates increase in liabilities of the Central Government without corresponding increase in assets of that Government. "Revenue deficit is a good indicator of whether the Government is living within its means," explains http://indiabulls.com.

The FRBM Act defines `fiscal indicators' as measures such as numerical ceilings and proportions to gross domestic product, for evaluation of the fiscal position of the Central Government. The job of specifying the `measures' is done in the FRBM Rules, 2004; there you'll find the list of fiscal indicators, such as three-year rolling targets for revenue and fiscal deficits, tax revenues and total outstanding liabilities.

All these are to be shown as percentages of GDP in the Medium Term Fiscal Policy Statement. Thus, the July 2004 Budget pegged revenue deficit targets as 3.6, 2.5, 1.8 and 1.1 from 2003-04 to 2006-07. And fiscal deficit is to peter more gradually as 4.8, 4.4, 4.0 and 3.6 over the same period. While total outstanding liabilities are promised to hover around 67-68, tax revenues are to rise from 9.2 to 12.1, jumping by about a percentage each year.

If the numbers seem to have a surgical precision, it's perhaps because of assumptions underlying the indicators. "With the deepening of tax reforms," the FM expects an average annual nominal growth rate of 12 per cent in GDP, and tax revenue to grow at 22 per cent, "based on an average annual growth of 26 per cent in direct taxes and 19 per cent in indirect taxes." There are critics who are dismissive of numbers as what may emerge from concerted book-cooking, generous budget-padding and obnoxious number-fixing. But, I guess, it is too early to benchmark the Minister against the rigour of FRBM.

Even if you don't make head or tail of most of what's said in the statements because of bureaucratic drafting, you'd concede that the whole exercise has a feel-good about it in the form of a snap progress card. If interested, take a look at Kelkar Committee's report on FRBM implementation which speaks of the two main questions about the fiscal correction required: one, early (`front-loaded') versus a late (`back-loaded') adjustment, and two, sharing of adjustment between taxation and expenditure.

India is not alone in seeking responsible fiscal behaviour. New Zealand has a Fiscal Responsibility Act of 1994; the EU has the Growth and Stability Pact; and in the US, Gramm-Rudman-Hollings legislation merits mention as lying at the origins of their search for a balanced budget. "Argentina, Canada, India and the United States have imposed legal constraints on their own fiscal behaviour, to reduce the temptation of state administrations to leave fiscal messes and to improve their creditworthiness in the markets," notes a paper on the World Bank's site.

There is a positive side to the whole exercise. If the FRBM works, we might hope to see the finances of the Government "as clear and intelligible as a merchant's books" so that every citizen would be able to comprehend them "to investigate abuses, and consequently to control them", as Thomas Jefferson said.

ZeroBase@TheHindu.co.in

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