After debating the merits of a fiscal responsibility Bill, the government has decided to postpone it for another fiscal. The finance ministry has also decided the Fiscal Responsibility and Budget Management (FRBM) Bill will primarily measure improvements in the fiscal environment by comparing public debt to GDP instead of chasing down the revenue deficit.
The government had been planning to table an updated version of the fiscal responsibility Bill in Parliament ever since the last one lapsed in 2009-10. But with every year since then throwing up a fresh challenge, the government has had to postpone writing into law a fiscal deficit reduction plan. The govenment has not been able to stick to the fiscal consolidation path since 2008-09.
The Bill has been sent to the Comptroller and Auditor general’s office for comments. It has also been decided that the CAG rather than the Finance Commission will monitor the performance yardsticks.
For 2012-13, the government had done some work on the Bill but that has been packed up for now. ?The reason is simple,? explained a key official who has an understanding of the Budget process. ?There is still no certainty on the worst-case scenario for the fiscal deficit in 2012-13.?
The other reason to postpone the Bill is because of plans to replace the revenue deficit as an indicator of fiscal correction with the public debt-GDP ratio. The revenue deficit measures the extent to which the government is financing its current expenditure through current revenue. A deficit indicates the government is borrowing from the markets to pay for its current expenses.
But the finance ministry feels that a revenue deficit reduction target misses out on the multiplier effect of government expenditure as well as reduces the ability of the Centre to undertake counter-cyclical measures like pumping up expenditure when the rest of the economy is down.
In the last Union Budget, the UPA government took on major expenditure commitments including the Food Security Bill, the right to education and the national rural health mission for the next fiscal.
These are in addition to the cascading effect of this fiscal’s subsidy of almost Rs 2 lakh crore, committed expenditure like refinancing balance sheets of public sector banks and increasing interest payments, as borrowing has soared by Rs 92,800 crore. The official said there is no way now to estimate the full impact of these plans on the budget.
The National Rural Employment Guarantee Act was launched with a budget of Rs 8,000 crore which subsequently ballooned, before settling at Rs 40,000 crore by 2009-10. New programmes too will take time to unfold. Larger commitments will mean greater drag on the fisc.
So, the government will prefer to wait out a longer period to see how its expenditure plans unfold. This is despite the strong positive ripple effect a fiscal responsibility legislation would have created. But as the mid-year review of the economy issued by the ministry in December 2011 noted, “the nature of fiscal deficits in India is largely structural and hence, the return to fiscal consolidation has to be on a graduated path”.
The government expects to end the fiscal with a deficit of close to 6% as hardly any of its additional revenue generating measures have come through. For the next fiscal, the government will be hoping to set a deficit target close to 5% of GDP.
While this is seen as ambitious, the government expects the tighter numbers will keep up the momentum in the ministries to control their expenditure.
The government had estimated the fiscal deficit to be 4.6% of the GDP in the budget estimate. The additional borrowing of Rs 92,800 crore to finance the expanded subsidy bill has put paid to those numbers.
