Fiscal prudence thrown to the winds

The twin challenges facing the economy are low growth rate and high inflation. Coping with this is a demanding task for fiscal management. The added pressure of the coming election makes basic fiscal reform an urgent necessity.

India’s track record in fiscal responsibility is not encouraging. Even a decade after the Fiscal Responsibility and Budget Management (FRBM) Act 2003 was passed by Parliament, the targets for fiscal deficit have not been met. Why is this, what does it imply, and what action should be taken?

As a background, there are examples of major expenditure commitments with the 2014 election in view, showing up a lack of concern for fiscal soundness.

Reckless measures The National Food Security Act 2013 aims to make available rice at ₹3, wheat at ₹2 and pulses at ₹1 a kg to 75 per cent of the rural and 50 per cent of the urban population. The annual cost is estimated at ₹1.24 lakh crore. The Interim Budget for 2013-14 made a provision of ₹92,000 crore which is about ₹40,000 crore short of the requirement as reported by the Food Corporation of India.

The independent evaluation office (IEO) of the Planning Commission has pointed out that it costs ₹3.65 to deliver food worth one rupee and about 36 per cent is siphoned off from the supply chain. Issues to be resolved include the lack of storage space for large stocks of foodgrains and the cost of constructing additional storage space, defects in the public distribution system and steps to ensure that foodgrains reach the beneficiaries.

A general shortcoming in subsidy handouts is the lack of attention paid to the cost of goods and services, the scope to reduce it and the subsidy payable. This calls for a critical examination of FCI’s operations and efficiency. The government has to ensure that the Minimum Procurement Price for wheat is not too high and a contributory factor for inflated prices.

Another scheme undertaken prior to the 2009 Lok Sabha election continues to be unproductive even today, with crores crores being spent from the Central Budget (₹31,372 crore in BE 2013-14). The Mahatma Gandhi Rural Employment Guarantee Scheme provided 100 days of wage employment in a year; pre-poll, it has now been increased to 150 days for tribals. The basic defects in the scheme are ghost workers, impermissible works, incomplete works and full wages not reaching the workers. Besides, agriculture is affected by the non-availability of labour.

The latest example of fiscal recklessness is the bifurcation of Andhra Pradesh. The reorganisation was done without any serious discussion as the Bill was put on a fast track and rushed through. The Prime Minister announced a six-point package, Special Category State status, tax incentives and 90 per cent Central aid as grant. This is a matter which should have been discussed and approved by the National Development Council. The Central government is reported to have put in place an action plan to develop eight to ten cities in Seemandhra as specialised “mini capitals”. All this will put a huge burden on the budget.

Fiscal reform goes beyond reduction of the quantum of fiscal deficit. Fixing the optimum quantum of deficit is the first step. Achieving the target can be done only through a critical review of the expenditure and revenue components of the budget.

Deficit targets The deficit targets are prescribed in the FRBM Act 2003; the deficit on revenue account has to be eliminated and the overall fiscal deficit brought down to 3 per cent of GDP. These have not been achieved even a decade after the Act was implemented. The relevance of the targets depends on changes in the economy, now facing low growth and high inflation.

The accuracy and timeliness of GDP data need examination, as the annual budget is prepared on GDP estimates. More light should be shed on how the quantum of government borrowing assumed for the budget year is fixed in relation to the desirable volume of money supply as projected by the RBI. This will also facilitate better coordination between fiscal and monetary policies. After fixing the optimum quantum of fiscal deficit, achieving these requires a fundamental review of expenditure policy and revenue realisation to achieve growth and inflation targets.

Fixing remedies Specific issues and remedies can be highlighted. For instance, treating Plan expenditure as developmental and non-Plan expenditure as non-developmental is not such a great idea. Non-development expenditure, particularly subsidies, should be reduced, while strengthening supply chain arrangements for inflation control and providing for alternative sources of energy should be considered as development expenditure. Examples on the revenue side include reduction of arrears in revenue collection, bringing undeclared money under the tax net and reviewing the massive tax exemptions, ₹5.73 lakh crore in BE 2012-13.

The medium-term budget revenue and expenditure projections under the FRBM Act 2003 have to be transparent, indicating the results of reforms done or envisaged; mere aggregate figures are not enough to assess the quality of fiscal deficit reduction. It is time Parliament goes beyond approval of the annual budget. It could periodically review the effectiveness of implementation of the FRBM Act 2003.

(The writer was Joint Secretary in the Union Government and IMF budget adviser)

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