‘New FRBM law must focus on eliminating revenue deficit’

While fiscal deficits and high debt is roiling major economies across the world, India is in the process of reviewing its own decade-old Fiscal Responsibility and Budget Management Act. The NK Singh Committee has been asked to look into the merit of switching over to a range instead of the present practice of a fixed deficit target every year. Experts fear the government will be tempted to loosen the fisc and attain the upper band of the range if it is adopted. Speaking to Bloomberg TV India , former Finance Minister and the craftsman for the FRBM law, Yashwant Sinha says the government should aim at eliminating the revenue deficit so that the borrowings it makes is used for investments in productive purposes. Drawing analogy between the present NPA crisis and that in 1998, Sinha said the government should try to turn around the economy.

The government has set up a FRBM review panel. What does it signal? Is the comprehensive review aimed at allowing fiscal expansion when the economy is in a down turn?

When the Finance Minister (Arun Jaitley) announced the formation of this panel, I had welcomed it. In my reaction to the Budget, I had said it is a very good development that 13 years after the FRBM Act was passed — while we have not achieved the objective of the Act — it is a good time to sit down and view where we stand and where we want to go in the future. And I hope the committee under the chairmanship of NK Singh will be able to do a good job and suggest a roadmap for the government, which will then become the new FRBM Act.

What kind of changes will you like to be put in place in the Act, for at least the next decade, if not more?

I am very clear about the future course of action. In the original Act, which I had introduced in the Parliament, I had suggested that we should achieve a fiscal deficit level of 2 per cent of GDP within 4-5 years. The final Act talked about 3-per cent deficit. So let it be 3 per cent — I have no issues with that.

But the most important aspect of that original Act was that we shall completely eliminate the revenue deficit, which represents unproductive expenditure of the government. So we said we shall completely eliminate the revenue deficit of the government in that five-year period and then we can live with 3-per cent fiscal deficit. The idea was to completely eliminate unproductive expenditure that is financed through borrowings and that whatever the Centre shall borrow in future would be spent on productive purposes. It was very important from the inter-generational equity point of view that we were not borrowing for current consumption, but for investment, and that we were able to repay that debt much better than failing to repay our debt if it is on current consumption. That was the basic idea.

The situation today is that we have failed to eliminate the revenue deficit — it is still stubbornly over 2 per cent of the GDP. If you eliminate the revenue deficit, then the fiscal deficit is 1.2 or 1.5 per cent of the GDP. The committee should find out ways and means of eliminating the revenue deficit. Once you have eliminated the revenue deficit, then even if you raise the fiscal deficit to 3 per cent of the GDP, all this money will become available for investment. And the kind of fiscal expansion or no fiscal expansion that we are talking about will not be an important question because the entire amount will be investment expenditure.

We had asked several leading economists, including former Finance Secretaries and former Chief Economic Advisor, their views on one of the terms and reference, which talks about a range for the fiscal deficit instead of a fixed target. Experts fear that if you introduce a range, the government of the day will aim for the upper end of the range because that is human behaviour and psychology. Do you think the range is a formula that will end up keeping the deficit at the upper end all the time?

I don’t think the range is a good idea, quite frankly. If you are serious about controlling fiscal deficit, and more particularly revenue deficit, then you can fix the specific target year-on-year and then try and achieve it. The FRBM is an Act of Parliament, isn’t it? Now what has hapened in all these 13 years? Finance Minister after Finance Minister has amended the FRBM Act through the Finance Bill in virtually every Budget that has been presented to the Parliament. And members of Parliament have accepted it, passed the Budget, passed the Finance Bill and they have not protested against the violation of the FRBM Act.

I think the committee should strongly recommend that the FRBM Act be amended only through an amendment of the FRBM Act and not through any other means — mainly through the Finance Bill or any other device such as the Appropriation Bill that the government might present to the Parliament — so that each member of the Parliament is aware of what he is voting for.

The second important point is that you have the scope for this fiscal expansion. You can justify in the report you present to the Parliament under the FRBM Act that any breach which might take place for some very specific reason in that year.

In FY09, we raised the fiscal deficit of the government to 6 per cent from 2.5 per cent in FY08. The government justified it and the Parliament accepted it. There was no revolution in this country on why FRBM Act was violated in such a brazen manner. And we have lived with fiscal deficit and revenue deficit since then.

You have made a very significant point. The report is to come by October. The new mandate, whatever it will be, may be announced in the next Budget. The point you are underscoring is that you have to go through parliamentary review in the form of an amendment to the FRBM Act and through the Standing Committee. And the right of the Parliament to hold the government accountable to it is very important. Should the FRBM Act in future deserve some sanctity?

I’ll just make one more point on the fiscal deficit side. Whatever target we fix ultimately, whatever recommendations of the committee we accept — and I hope that the committee will make worthwhile recommendations — my point is that we should not rush it. We should not treat it with the kind of disdain the FRBM Act has been treated with in the last 13 years. It should be shown some respect. After all it is an act of the Parliament.

Compared with the banking sector crisis during 1998, what’s your assessment of the current stress we are witnessing in the banking sector?

The numbers might be different, but I think the situation we faced in 1998 was perhaps much bigger, much more basic and more fundamental of what was happening in the economy. It calls for sustained effort to deal with the NPA issue.

We had dealt with it by strengthening the Debt Recovery Tribunals, enacting the SARFAESI Act and taking other steps. But to me, apart from the legal framework of dealing with the NPAs, the most important thing is to turn the economy around.

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