There is a renewed thrust on economic reforms under the NDA government. Some, like the increase in FDI limit for insurance, have been implemented, while others, like GST and land Bill, are in progress. Economic reforms are primarily being discussed either in terms of FDI or with respect to rules and processes relating to ease of doing business in India. The major thrust remains on attracting FDI.
Now, while these efforts are laudable, a major reform is needed in the system of fiscal governance by the government of India itself, which has not been given due importance. One of the major pillars is the Budget exercise and the reliability of accounts prepared by the government. The Budget, in fact, draws huge interest from across the country and its importance in terms of economic planning is acknowledged by all. For such an important exercise, the government still follows the archaic cash accounting based on a single entry system. Accordingly, the revenue physically received by the government in a year is taken as revenue of the government and expenditure physically incurred is treated as expenditure.
The purpose of a Budget exercise, for any entity, is to determine a direction for the coming year or years in terms of aspirations and resources required to meet those aspirations. Each company does this—some for the immediate year and others for longer periods of 3-10 years. Whatever they may be called—annual operating plans, budgets or business plans—the crux is the same. It should not be any different for India if it intends to operate as India Inc. It is imperative that the financial performance of a company or, for that matter India Inc, is correct and reliable, which clearly cannot be judged by results prepared on ‘cash’ basis.
So, what do we need to do?
* Move accounting and budgeting to double-entry system and accrual-based accounting: It is common knowledge that, at the end of a fiscal year, the pressure from the tax department—be it income tax, service tax, customs duties or excise—mounts for not only taxes which may be due, but also those which are demanded to be paid in advance so as to enhance revenue figures and to show lower fiscal deficit. The reason for this tax collection initiative is cash accounting system. The worst part is that, to show growth in successive years, advance collections need to be compounded. As a result, any meaningful estimate of revenue for the next year becomes impossible. It is important that India moves to a double-entry and accrual method of accounting to avoid such intentional misstatements and wrong accounting, and presents a more transparent picture of the state of the economy annually. Needless to say, as long as this practice of ‘extortion’ persists, we can forget about ease of doing business in India.
Most developed countries have already moved to accrual accounting; about 40 countries have already adopted it.
This matter has been under the purview of the government since 2002 when the Government Accounting Standards Advisory Board (GASAB) was set up. The 12th Finance Commission recommended the transition to accrual-based accounting in 2004, with a few mandates to GASAB.
(i) To establish and improve standards of governmental accounting and financial reporting, and formulate and propose standards that improve the usefulness of financial reports based on the needs of the users; and
(ii) Since the principles of accrual accounting being followed in commercial entities cannot be transposed in their entirely in government accounting, GASAB was entrusted with preparing a roadmap for transition to accrual accounting system and operational framework of such a system that will prevail in the government.
However, even after a decade, little progress has been made in fulfilling either of the mandates. The advantage of moving to double-entry based accrual accounting system is obvious. On one hand, it would give a correct position of the government’s revenue and revenue expenditure based on the amount committed, even though they may not be fully received or paid, respectively. On the other, the government would be able to prepare a balance sheet, showing not only the various assets and investments made by it based on accounting standards, but would also account for the many commitments made but not paid as its payables at year end. The preparation of the balance sheet based on double-entry system would show total liabilities of the government—both long- and short-term.
This would enable correct reflection of revenue deficit or surplus, capital expenditure/investments for the year and overall debt. These three need to be separately seen as percentage of GDP (which would be calculated as before).
This move would provide necessary transparency in respect of government accounts and enable it to better plan for the coming year as well as for a longer period. All analysts, including rating agencies, would be in a better position to work out expected ratios like net debt-to-GDP and other productivity indicators for the economies, which would enable India to invest more and attract more investments by way of debt and equity.
* Audited accounts and variance analysis: The government must complete the audit of its accounts based on double-entry system in a timely fashion, just like it expects corporates to do within a specified period. It should separately, as part of its annual report on fiscal performance, present the said audited account versus the Budget that had been presented along with reasons for variances. It would be ideal if this is made part of the Budget presentation by the finance minister where he could take the actual for three quarters of the previous year and the last quarter estimates. The full year audited accounts versus Budget should be separately presented in Parliament session in July of next year or in the monsoon session.
* Five-year rolling Budgets: The government must introduce a five-year rolling Budget to provide longer visibility of plans and provide for requisite resources needed to fulfil those. For a growing economy like India, such a rolling Budget is of vital importance. It should be amended each year to reflect actual performance and revised estimates along with reconciliation of the original Budget and revisions with reasons for such deviations.
These measures would not only bring greater transparency, but also better discipline on the part of the government.
This would ensure the government is in a position to undertake significant capital expenditure that is required from time to time to accelerate growth without worrying about high fiscal deficit, as long as those investments are projected to produce revenue in the coming years and enhance GDP. With such measures in place, the Indian economy would be among the most preferred destinations for global investors in the years to come.
The author is vice-chairman, Bharti Enterprises. Views are personal