|
| ||
|
TODAY'S COLUMNIST
|
||
|
Fiscal Responsibility Operationalised The Act stipulates the elimination of revenue deficit by March 31, 2008 (the finance minister intends to amend the Act to make this effective from March 31, 2009). Annual targets are set out to enable the public to know whether the government is on track. There are also stipulations on government borrowing and debt. The authorities clearly recognise the need for inter-generational equity.
The revenue deficit is to be reduced by a minimum of 0.5 per cent of GDP per annum. In the Medium Term Fiscal Policy Statement, it is stated that the revenue deficit would be brought down from 3.6 per cent of GDP in 2003-04 to 2.5 per cent of GDP in 2004-05. The finance minister has, in a sense, put his credibility on the line in the very first year of the programme. The rolling targets provide for a reduction in the revenue deficit to 1.5 per cent in 2005-06 and to 1.1 per cent in 2006-07. The reason why the FM has sought an extension of one year appears to be the recognition that as the revenue deficit reaches lower ranges, it becomes harder to reduce it further.
Cassandras have been vigorously challenging the FM’s revenue estimate for 2004-05. Critics should be silenced by the provisions in the FRBM rules which provide that if the revenue deficit is higher than 45 per cent of the budget estimate for the year or the total non-debt receipts are less than 40 per cent of the budget estimates for the year, corrective measures would be taken and the manner in which any supplementary demands are proposed to be financed have to be set out before Parliament. Thus, there is a built-in mechanism for mid-course correction.
The FM has announced that the fiscal deficit as a percentage of GDP would be 4.4 per cent in BE 2004-05 as against a revised estimate of 4.8 per cent in 2003-04. The medium term rolling target is 4 per cent for 2005-06 and 3.6 per cent for 2006-07. It makes sense for the fiscal deficit to be cut at a somewhat slower pace than the revenue deficit. It is easy to cut fiscal deficit by cutting capital expenditure for social services and infrastructure but such measures hurt long term sustainability. Here again, if the fiscal deficit is higher than 45 per cent of the BE by September, the government has to take corrective action.
Gross tax revenues as a percentage of GDP is expected to rise from RE 2003-04 of 9.2 per cent to 10.2 per cent in BE 2004-05. It would be possible to monitor how well the performance is vis-a-vis the targets. An important feature is that there are targets for total outstanding liabilities as a percentage of GDP. As against an RE of 67.3 per cent for 2003-04, the ratio is estimated at 68.5 per cent for BE 2004-05, 68.2 per cent for 2005-06 and 67.8 per cent for 2006-07. This shows that the government has to curb the inexorable growth in this ratio before it can be reduced. The stupendous nature of the problem is despite rule 3(4) of the FRBM rules stipulating a cap on increase in total liabilities of the central government as a proportion of GDP at 9 per cent for 2004-05, 8 per cent for 2005-06, 7 per cent for 2006-07 and 6 per cent for 2007-08.
All these ratios could earlier on be manipulated by a shroud over the GDP estimates at current market prices. This is no longer possible. The medium term growth of nominal GDP is expected at 12 per cent comprising 4-5 per cent inflation and 7-8 per cent real growth. In 2004-05, the nominal growth could be higher around 13 per cent with inflation of 5.5-6 per cent and real growth of around 7 per cent.
The FRBM rules also cap the level of guarantees and prohibits government from borrowing from RBI from April 1, 2006. The government would limit guarantees to 0.5 per cent of GDP. The restriction on borrowing from the RBI relates to subscription by RBI to primary issues; when this measure becomes effective, there should be safeguards to ensure that the rules are not subverted by RBI operations in the secondary market. For instance, it could be prescribed that outstanding RBI credit to government should not exceed 25 per cent of revenue receipts.
One of the major objectives of the FRBM Act is to effect a shift in the composition of total expenditure in favour of capital expenditure. The eventual elimination of revenue deficits and generation of surpluses will provide the government the desired flexibility in enhancing capital expenditure.
Cynics would see the additional Rs 10,000 crore outlay to be allocated by the Planning Commission as a giveaway. To the credit of the government, the tilt would be on efficiency of the delivery system and the increased allocation would be for pilot projects which would be closely monitored.
The fiscal policy strategy statement takes an unequivocal stand on inflation which deserves close attention: “Inflation hurts the poor the most through the inflation tax. High levels of domestic inflation in a situation of increasing openness across national borders imply serious trouble for fixed-income earners and damage the medium/long prospects of savings in the economy. It will increase the pressure on interest rates and thereby cause increased burden on both government and corporate finances, loss of competitiveness and eventually a slowdown in growth. In the short-term, it will also exacerbate the problems in management of external sector with hot money inflows rushing in to cash-in arbitrage opportunities. Keeping these considerations in mind, the government wishes to work closely with the RBI with the aim of restraining inflation”.
There could not be a more clearly stated policy commitment on inflation. It is time monetary policy transparency and inflation targeting should be revisited by the government and the RBI. | ||
|
URL: http://www.financialexpress.com/fe_full_story.php?content_id=64050 Print this Story
Expressindia | The Indian Express | The Financial Express | Screen | Kashmir Live About Us | Advertise With Us | Privacy Policy | | Labelled with ICRA© 2005: Indian Express Newspapers (Bombay) Ltd. All rights reserved throughout the world. Top | Close this window |