Soft constraints

Finance Minister P. Chidambaram’s suggestion that such things as the fiscal deficit, current account deficit (CAD) and the inflation control mandate of the RBI be placed beyond the discretion of the government, deserves to be considered seriously. As he has pointed out, the Fiscal Responsibility and Budget Management (FRBM) Act 2003, rather than being cast in stone, is a “very malleable” piece of legislation giving governments the leeway to routinely default on the deficit targets they set. The Finance Minister’s thoughts could have been promoted by the fiscal deficit — which unlike the CAD — seems somewhat out of control this year. Between April and September, the gap between the Centre’s total spending and revenues (inclusive of non-debt capital receipts) amounted to 76 per cent of the budgeted target for the entire fiscal. The revenue deficit, too, had already reached 85 per cent of the budget estimate. At this rate, achieving the budgeted targets of 3.3 and 4.8 per cent of GDP for the revenue and fiscal deficits respectively appear extremely difficult despite Chidambaram’s assurances that “red lines” will not be breached.

The fiscal slippages have been largely due to gross tax revenue growth (7.8 per cent), so far falling well short of the targeted 19.2 per cent for 2013-14. Besides, there has been little progress on the mobilisation of the roughly Rs 80,000 crore projected from disinvestment and spectrum auctions. The FRBM law requires the Centre to review its fiscal position on a quarterly basis and “take appropriate measures for increasing revenue or for reducing expenditure” in the event of deviations from budget estimates. But the force of this directive is diluted by a provision permitting deviations with the “approval of Parliament”. Such approval isn’t hard to come by in a political culture where a government may face flak over rising prices or slashing fuel subsidies, but not for overshooting deficit targets. The FRBM legislation, in fact, had originally mandated an elimination of the Centre’s revenue deficit by 2007-08. But far from being plugged, it is budgeted at Rs 3,79,838 crore for 2013-14!

Limiting the discretion of government can be achieved only if the FRBM Act is amended to allow deviations from budget estimates only in extraordinary circumstances (war, for instance) or for truly compelling reasons. Such deviations are now permitted under the vague, general and undefined category of “unforeseen circumstances”. It is imperative to tighten the definition to prevent governments from privileging short-term populist giveaways over long-term fiscal health, an approach that undermines growth potential and even the capacity to fund targeted pro-poor schemes. One hopes that the next Government, whatever shape it takes, will have the political sagacity to give real teeth to the FRBM Act; this will require courage as it would mean limiting its own discretionary power.

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