Check fiscal recklessness

Our economy is in a very bad shape, and our fiscal deficit situation is not looking very much better.

The central government’s track record in implementing the Fiscal Responsibility and Budget Management (FRBM) Act passed by Parliament in 2003 has been dismal. After ten years, the target of 3 per cent of GDP is still to be met. The medium-term projection for the current year’s budget indicates that this target will not be realised even in 2015-16. The current year target of 4.8 per cent is likely to be exceeded, as it reached 86 per cent of the targeted amount by October. The basic approach to fiscal consolidation needs to be reviewed.

Eliminate non-priority expenditure

The routine remedies of austerity in expenditure and ad hoc cuts in non-Plan expenditure will not do. A distinction should be made between development and non-development expenditure, and not between Plan and non-Plan expenditure. All non-Plan expenditure is not non-developmental and all Plan expenditure is not necessarily growth-promoting and developmental. The list of schemes/activities should be drawn up accordingly, indicating the savings expected.

Ministries are currently required to do zero based budgeting, or undertake a fresh scrutiny of the current relevance of schemes as part of annual budget preparation. The quantified results of such reviews should be published.

Effectiveness of spending There is considerable scope for cutting non-development expenditure. The latest example is the National Food Security Act. On the other hand, subsidy for installing solar power is not disbursed even though it is for development of alternative sources of power .

Infrastructure like power, roads, railways and communication like telecom is a developmental investment. Increased allocations for these as well higher allocation for agriculture and food production needs to be highlighted in the fiscal deficit management plan.

The working of public sector units needs a critical look to reduce dependence on government for investment. Immediate examples are the Railways and Bharat Sanchar Nigam Ltd. PSUs should be asked to contribute dividend to government only after their internal resources are enough to meet their own legitimate needs. PSU dividend is no substitute for rational reduction of the government budget deficit. PSU banks need to be closely watched for their rising bad debt levels. This merits possibly an audit scrutiny by the Comptroller and Auditor General. The tax incentives and exemptions, at Rs 5.73 lakh crores projected for 2012-13, account for substantial loss of revenue. These concessions need to be examined. The fiscal plan should reflect the results of this review.

It is not enough for the government to confine itself to weeding out non-developmental expenditure and focus on development and growth. The Government has to ensure efficiency and effectiveness of expenditure. Output and outcome budgeting has not yet become a management tool.

Quantum of fiscal deficit

The index of fiscal deficit as percentage of GDP takes the focus away from the quantum of deficit in rupees. Transparency and accountability require a database for fixing the amount each year. The public has to be satisfied that the government borrowing is at the optimum amount in coordination with the RBI’s monetary policy. Understatement of expenditure especially in subsidies has to be avoided. Borrowings by PSUs should also be highlighted as this too is de facto government borrowing, and crowds out private investment.

(The author was Joint Secretary in the Union Government and IMF Budget Adviser.)

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