Setting the target right

The Union Budget is a tool for promoting the country’s economic growth and controlling inflation. Methods of raising revenues, priorities in spending and the amount of market borrowing determine the effectiveness of the budget as a tool. Fiscal reform covers all these areas and is an arduous, complex and time consuming exercise.

The Constitution left it to the legislature to fix the limits to government borrowing. After 50 years, Parliament passed the Fiscal Responsibility and Budget Management Act 2003, effective from 2004-5. The fiscal deficit limit was fixed at 3 per cent of GDP. It remains the limit even now.

Quality concerns The fiscal deficit has been above the statutory limit ever since FRBM Act came into force. It is 4.6 per cent of GDP in RE 2013-14. The new Government has a target of 4.1 per cent in the budget for 2014-15 and hopes to reach the 3 per cent goal in 2016-17.

During the past decade, deficit management focused on the quantum of deficit reduced and not the quality of reduction. Short cuts such as disinvestment of shares in government companies took precedence over reforms in revenue and expenditure management. Subsidy reduction was achieved through price increases to consumers without reviewing the cost reduction possibilities. The budget provisions for subsidies need a close look for understatement of costs. Unpaid bills are not reflected in the budget which is cash based.

Over this period, there was no review of the expenditure budget to weed out non-priority items and look into better implementation of schemes. There were no reforms in revenue realisation.

With this legacy from the previous government, the task of fiscal reform has become all the more challenging for the new government. The first budget presented for 2014-15 naturally bears no trace of fiscal reform.

There is every hope that a comprehensive medium term fiscal reform plan with all supporting data will be drawn up for parliamentary approval and implementation within a reasonable time frame.

Government borrowing affects funds for the private sector. The total money supply availability for the year is determined by monetary policy. Steps to coordinate fiscal and monetary policy should be indicated while determining the fiscal deficit. Borrowings by PSUs and autonomous government should be taken into account in fixing fiscal deficit.

Remedial measures ‘Priority’ and ‘non-priority’ should be precisely defined and the expenditure review should weed out all non-priority items. The Plan/non-Plan distinction needs to be replaced by development/non-development expenditure. Specific data on the schemes deleted or toned down and new schemes should be given as supporting data for expenditure review.

Glaring examples of this include the rural employment guaranty scheme, which does not result in any productive employment while affecting supply of agricultural labour, and National Food Security Act, which gives subsidised food with doubtful targeting.

Both were pre-election offerings. MPLAD (Member of Parliament Local Area Development) scheme costing ₹4,000 crore per year without utilisation on local development works needs review.

Specific steps to promote efficient expenditure management have to be laid down. Dependence of PSUs on government, non-closure of defunct PSUs and loss-making PSUs need remedial action.

The poor financial condition of the Railways, a departmental undertaking, has to be set right to reduce dependence on government budget.

On the revenue front, expediting new tax laws, reviewing the relevance of tax exemptions and concessions for more than ₹5 lakh crore in the present context of promoting growth and containing inflation, speeding up collection of tax arrears, bringing undisclosed income in the tax net are examples of issues for remedial action. Tax revenues given up could be treated as tax expenditure requiring parliamentary approval.

The fiscal deficit target laid down in the FRBM Act 2003 is 3 per cent of GDP. It has not been modified in keeping with changing economic conditions.

The relevance of this static 10 year old target under changing conditions of growth and inflation is not clear. The fiscal policy statement and fiscal strategy statement released under the Act lack specific supporting data. Drastic amendment of the Act is necessary while preparing a fiscal reform plan.

The writer is a former Budget Advisor of the IMF

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