In a recent meeting the finance minister declared the government?s intention to move over to accrual accounting as quickly as possible. Some progress has been made and a rough time table is ready. There is still considerable confusion, however, even amongst knowledgeable persons on the requirements of the switch over. Now, PPPs are now being emphasised in the stimulus and in the hundred days programme, and the principal will integrate balance sheet accounting with government procedures. Also, and this is not commonly recognised, the procedures will require a call on government borrowings in relation to investment funding and not just a mechanical adherence to zero fiscal deficit.
Accrual accounting goes back to the International Data Dissemination of Data Standards of the IMF accepted by India when the present author was Minister of Science and Technology and Planning including Statistics. Government accounts move over from cash flow accounting on an annual basis to the principle of the completion of a project as the accounting horizon. A balance sheet component is then introduced in public accounts. Borrowings which were an anathema in the fiscal policy stance from the early 1990s, since by definition the fiscal deficit was ?bad? policy, would have to be built up from a disaggregated basis. For instance, borrowing for projects in an advanced state of completion may turn out to be profitable and this profile in a federal economy would have to be built up from the state and in principle even panchayati raj levels?as I kept on insisting monotonously when Mani Shanker Aiyar was arranging consultations.
This would be inconsistent with ad hoc borrowing rules, like all fiscal deficits are ?bad?, and the budget constraint will be built up more sensitively even in a normal policy period (it becomes compelling in a meltdown).
The earlier IMF concepts on government expenditure were very narrow and included expenditure where there was no fee component. This led to many problems. A seed programme would not be government expenditure if a small price tag was there. Rifaat Basanti, then Deputy Division Chief, Government Finance Division, Statistics Department of the International Monetary Fund which sponsored this concept had in a paper presented in the Panel on ?How To Improve Governance at the Inter-Governmental, Governmental and Private Sector Levels in Japan and Asia? of KEIO University?s 21st Century Centre of Excellence Programme, discussed actual attempts at integrating accrual accounting in a centre-local context of reform. Sayuri Shirai, who heads it, was probably one of the so called ?assassins? who played a major role as reformers. While Japan is not a federal country, the concepts have been introduced in the context of reform in the central/local context and this has direct relevance to the Indian discussion. Take an example. We have, with Central funds invested by a parastatal, completed the Indira Sagar Dam. With regulated releases from that dam, the economic return from completing the canals of the Sardar Sarovar Project is phenomenal. The Japanese would pick it out for investment in their reform. Here it will languish, because the state government is very profiligate and will never meet the restructuring rules set up by the Finance Commission and thus will never get the funds. Also, no one will solve the problem.
Basanti brings out that the Government Finance Statistcs Manual 2001 (GFSM 01) had at the base the balance sheet approach to government finance. It starts with the Statement of Sources and Uses of Cash, which is there at present, and is the basis of the concept of revenue and fiscal deficit. But there will have to be The Statement of Government Operations, and the difference between net operating balance and net acquisition of non-financial assets will be net borrowing. Other Economic Flows will measure valuation of assets through time. The balance sheet will then measure changes in net worth.
The Indian discussion does not set the conceptual base for this and is thus in a policy cul de sac, since it works only with arbitrary thumb rules. There will now have to be new rules: These will be
(a) The Golden rule of net borrowing through the cycle
(b) The Sustainable Investment rule which is the Borrowing and Debt/GDP rule
This is, of course, not a plea for extravagance. Any recommended rule would need a justification. This work would be the backdrop of the proposed Loan Council. However, there is very little discussion of these aspects of Indian federal finance.
I have gone into these arguments in some detail, because I believe the government is wisely accepting the advice some of us give from outside and hopefully targeting to reverse the investment famine of the 1990s. Economists must empathise with them rather than deriding investment strategies of the past.
?The author is a former Union minister and former vice-chancellor, JNU