JULY 18, 2009

By TIOL Edit Team

INTERNATIONAL Moneytary Fund (IMF) has done a favour to India by mooting reforms for fiscal consolidation, expenditure control and transparency in the Government's budgetary process.

In two country reports on India issued last month that virtually got overlooked by media due to budget mania, IMF has forthrightly recommended amendments to the Fiscal Responsibility and Budget Management Act (FRBMA), 2003 and/or in the rules framed under it.

IMF wants the Government to tighten the “definition of escape clauses” (FRBMA and FRBM rules) that the Government has relied on during 2008-09 and 2009-10 to let revenue and fiscal deficits go haywire.

It also wants the Government to reduce the size of deviations from different deficit indicators as well as market borrowings in a year. The budgetary system should have mechanism to correct deviations as well as to prioritize expenditure that would be cut if situation demands so.

IMF's most significant recipe perhaps is the call to “introduce explicit penalties that are applied automatically when fiscal targets are missed and/or budget procedures are not followed.”

FRBM Act grants absolute freedom and immunity to the Government in throwing to winds the statutory deficit targets. All that the Finance Minister is required to do is make a statement in Parliament when there significant deviations from the yearly deficit targets and other norms.

This self-belief that the Government always acts in public interest is no longer valid. We all know that the Government of the day camouflages its own desire for political survival and gains with public interest.

IMF has thus rightly proposed constitution of independent fiscal councils to assess compliance with statistical and accounting standards and fiscal rules ex ante and ex post. It wonders whether this responsibility could be entrusted to Controller Accountant General, Comptroller and Auditor General (CAG) and Parliament's Estimates Committee.

As mooted by several experts, IMF has proposed that the Government should bring all subsidy-related expenditures on the budget. It ought to gradually expand the coverage of fiscal accounts to include public enterprises that pose fiscal risk. This coverage should also be extended to special purpose vehicles contrived by the Government to fund projects under Public Private Partnership format.

A notable infirmity of the existing fiscal discipline law is that is the absence of clear account definitions of target fiscal indicators. “This has allowed creative accounting as reflected by the issuance of off-budget bonds to finance subsidies, which have thus been excluded from the definition of FRBMA-relevant deficit variable,” IMF adds.

The budget preparation exercise is also found wanting in transparency. “Numerical targets have not been supported by comprehensive expenditure reform plans,” it observes.

What applies to FRBMA also applies to similar laws in the States. Almost all States except perhaps West Bengal and Sikkim have enacted their respective fiscal responsibility law (FRL).

The Centre should perhaps convene a meeting of virtually forgotten National Development Council to do soul-searching along with States on political compulsions to go soft on fiscal discipline. The Centre should amend FRBMA and frame new rules. This should serve as model of fiscal discipline both in letter and spirit for all States.

There is a urgent need to control non-productive expenditure across the country. The laxity in expenditure management is cause for concern. As put by Finance Ministry in the

Medium-term Fiscal Policy Statement (MTFPS) that forms part of 2009-10 budget documents: “the government has to resort to borrowings for even meeting non-plan expenditure commitments. This brings us back to the issue of structural problems in the composition of expenditure which, if not addressed, will further squeeze out the fiscal space for undertaking developmental works.”

MTFPS also admits: “The task ahead in order to continue the process of fiscal consolidation is admittedly more challenging, especially with regard to the elimination of revenue deficit. The Thirteenth Finance Commission (FC) through an additional Term of Reference has been mandated to review the roadmap for fiscal adjustment and suggest a suitably revised roadmap to maintain the gains of fiscal consolidation through 2010 to 2015.”

The reforms ball is thus now in the court of FC. We hope it would factor in suggestions from IMF and from other quarters in its recommendations for fiscal responsibility in its report.

FC's eagerly awaited report is required to be submitted before 31 October 2009.

We hope the report will open a new chapter in fiscal discipline for short, medium and long-term benefits of the public.

Any new initiative in this direction would be line with the road-map for macro socio-economic reforms that the President unveiled in her address to Parliament in June.

The President Pratibha Devsingh Patil identified “prudent fiscal management” as one of the top 10 priorities of the UPA Version.2 Government over the next five years.