Open Kelkar Report On FRBM To Debate

Written by S Narayan | Updated: Jul 11 2004, 05:28am hrs
The finance ministry has notified the Fiscal Responsibility and Budget Management Rules on July 5, 2004, under the FRBM Act, passed by Parliament in 2003. This Act, several years in the cooking, finally emerged as a somewhat diluted version of the original concept. Concerns over rising fiscal deficits, runaway expenditures and large borrowings for Plan as well as revenue expenditure, had persuaded the finance ministry, as early as 2000, to attempt legislative controls on fiscal imprudence.

The first draft envisaged that excesses over the Budget deficit would entail immediate corrections through additional revenue mobilisation or cuts in Plan, subsidy and even current expenditure of the ministries on an automatic basis. Zero revenue deficit dates were set for 2007. Several drafts and a parliamentary committee later, the mandatory clauses were diluted to best effort approaches, without any financially punitive bite. The Act, as finally passed by Parliament, allowed the central government to set its targets for reduction of revenue deficit and the fiscal deficit, and for other liabilities including guarantees. These rules have taken several reluctant months to frame (the delay, in substantial part, due to the elections).

The rules require reduction of revenue deficit by 0.5 per cent of GDP every year to nil revenue deficits by March 31, 2008, and reduction of fiscal deficit by 0.3 per cent or more every year so as to reach a target of not more than 3 per cent on that date. In this Budget speech, the finance minister has announced his decision to amend the Act to push the dates by one more year, to 2009, signifying slippages in achieving these targets.

As part of the FRBM, government has tabled a Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macro Economic Framework Statement. The first largely follows the Economic Survey, takes credit for the improvements in the fisc during 2003-2004, but is devoid of any medium-term fiscal policy. It characterises the present macroeconomic environment as a challenge and an opportunity. This is quite a leap away from the finance ministrys assertions not so long ago that macroeconomic fundamentals have never been so good for the last 50 years. This is the second signal of hesitation.

The basic argument made in these documents is that, if the macroeconomic environment were robust, interest rates stable, and inflation under control, then revenue receipts would increase to 10.2 per cent of GDP this year. But the assumption of GDP growth of 12 per cent could underlie an expectation that inflation might cross 5 per cent!

Further, Budget expectations of gross revenue growth of 22 per cent, with 26 per cent growth in direct tax revenues and 19 per cent in indirect tax revenues, are very ambitious. Such expectations are much higher than decadal trend rates for these taxes, and there are very few measures in the Budget which will move these growth rates to such high levels. Coupled with data that the outstanding liabilities of the government are set to rise from 67.3 per cent to 68.5 per cent of GDP in 2004-2005, the roadmap for fiscal deficit management is quite unclear.

Several conclusions emerge. First, the fact that the responsibility numbers are in the rules and not in the main Act will enable successive finance ministers to keep pushing the goal-post forward. Indeed, this year, this is sought to be done through an amendment to the Act, within a year of its passage!

Second, unless the concerns of fiscal management are concerns for the government as a whole, the finance ministry alone cannot oversee expenditure control and discipline over proper utilisation of Plan resources. It would be left with tinkering with revenue receipts, which would be constrained by the politics of raising additional resources.

Third, any amount of discipline at the Centre will not solve the crises in the states. The performance of the few states (like Karnataka) that have passed similar legislation leaves no room for complacency on this score.

Finally, it is important that the problems are set out more transparently for public debate and discussion, so that concerns on fiscal deficit are shared by wider sections of society and government. For example, what about the market stabilisation bonds of the RBI who is responsible for the repayment and the interest Is government committed to expenditure squeeze if the second quarter figures indicate that fiscal deficit has crossed 45 per cent of the annual budgeted figure What is the mechanism being put in place for increasing non-debt receipts These are some of the issues needing greater clarity.

It is important to realise that on the fiscal front, we are in trouble. Borrowings account for 24 per cent of all receipts, and are just enough to pay for interest. Apart from contributing to non-productive expenditure, the real cost of fiscal deficit is in terms of growth foregone. The statements laid are a good first effort, and it is hoped that the committee set up in the finance ministry will make its recommendations in the public domain so that active interchange of views can be generated.

The writer is former finance secretary and economic advisor, PMO. The committee referred to was chaired by Dr Vijay Kelkar, advisor to the finance minister