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Let Growth with Fiscal Responsibility be new Reforms Mantra

APRIL 15, 2017

By TIOL Edit Team

FRBM Review Committee deserves applaud for recommending long-neglected fiscal reforms, apart from removing the cover over creative accounting used by successive Governments to under-estimate fiscal deficit.

The message of the report for the layman is that the Governments of the day have been living far beyond the means by over-relying on borrowings. As put by the Committee, "The maxim that ‘you cannot spend your way to prosperity' is now widely accepted. Fiscal policies must therefore be embedded in caution than exuberance."

The Committee has aptly titled its report as ‘Responsible Growth -A debt and Fiscal Framework for 21st Century India'.

In its report made public on 12th April, the Finance Ministry-constituted Committee has recommended enacting a new legislation ‘The Debt Management and Fiscal Responsibility Bill, 2017.' The proposed comprehensive law should replace often-amended Fiscal Responsibility and Budget Management (FRBM) Act 2003 and rules framed under it.

Another major recommendation envisages setting up of a statutory Fiscal Council to oversee fiscal transparency and accountability and guide the Government in improving the country's fiscal profile.

The ball is now in the court of Finance Ministry. It has simply put the report in public domain for seeking comments, instead of acting on its recommendations straightaway as it did in the case of Expenditure Management Commission (EMC).

As FRBM Review panel, chaired by N.K. Singh, a leading MP who once served as Union Revenue Secretary, has referred to EMC's recommendations, it makes sense for the Ministry to make latter's report public too.

A reading of the two related reports would help public especially economists and analysts to make better recommendations for improving in the entire process of budget, expenditure, taxation and fiscal accountability.

A notable feature of the Bill drafted by the N.K. Singh Committee is incorporation of cap on the combined debt of the Centre and the States. It has recommended that these general government borrowings should not exceed 60% of GDP in a year. And this debt should be raised in the ratio of 40% and 20% by the Centre and the States.

Noting that many countries have been targeting a debt to GDP ratio of 60%, the panel has recommended that this ceiling should be achieved in 2022-23 by phased reduction in borrowings.

This debt rule of 60% of GDP for prudent resort to borrowings is nothing new. It was perhaps first stipulated in Maastricht Treaty signed Western European nations in February 1992 for forming European Union.

Another salient feature of the Bill is that it specifies revenue and fiscal deficit targets. The targets at present don't figure in FRBM Act and instead find mention in FRBM rules, which the Government has been amended merrily to suit its political objectives.

The Committee has thus sought to bind the Government to fiscal discipline through elaboration of core issues in the legislation. Listing fiscal & revenue deficit targets for six years ending 2022-23, the draft Bill says: "No deviations are permissible from the targets specified in this section except in accordance with section 7."

The Bill permits deviations subject to advice of fiscal council and on specified developments such as threat to national security and war.

Unfortunately, the Committee has not gone the whole hog in specifying the penalty for breach of the targets. It could have specified impeachment of the Government for non-compliance. It does not even provide for movement of censure motion by Members of Parliament against Government's non compliance with fiscal and revenue deficit targets.

The Committee has, in fact, sought to grant absolute immunity to the Government for its any fiscal decision. It has done so by lifting immunity clause from FRBM Act and incorporating them in proposed Bill.

The draft Bill says: "No suit, prosecution or other legal proceedings shall lie against the Central Government, any officer of the Central Government or the Chairperson or Members of the Fiscal Council for anything which is done in good faith under this Act or rules."

It adds: "No civil court shall have jurisdiction to question the legality of any action taken by, or any decision of, the Central Government, under this Act."

FRBM Review Committee's other recommendations in areas such as fiscal transparency and accountability are commendable.

We hope Finance Ministry would accept its recommendations. It would be great if the Government unveils a roadmap for fiscally responsibly, inclusive and robust growth during the Monsoon session of Parliament.


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