The Hindu : Business : Shortfalls in fiscal performance

Online edition of India's National Newspaper
Monday, Dec 20, 2004

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Shortfalls in fiscal performance

Hasty and inadequate project preparation, poor project implementation and lack of sustained funding have led to cost and time overruns in schemes and projects.

THE FIRST budget of the UPA Government presented in July was also the first under the Fiscal Management and Budget Management (FRBM) Act. The Act and the Rules prescribe a mid year assessment of trends in receipts and expenditure and achievement of targets on budgetary deficits. If the revenue or fiscal deficit exceeds 45 per cent of the budget estimates the Finance Minister has to detail the corrective measures taken and the manner in which any supplementary demands are to be financed and the prospects for the fiscal deficit of the financial year. The mid year review of the economy submitted in Parliament is to meet this statutory requirement.

Deficit targets exceeded

The fiscal picture at the end of September reveals a revenue deficit of Rs. 59,951 crores (79 per cent of budget estimate) and a fiscal deficit of Rs. 53,235 crores (39 per cent of BE). The figures for October show further deterioration with revenue deficit at 83.9 per cent of budget estimate and fiscal deficit at 45.2 per cent. The deficit targets have been exceeded. The year-end position may be worse if the Finance Commission report is implemented and the high cost loans from the NSSF are retired.

The Finance Minister has conceded that key parameters of fiscal performance fall short of targets set by the FRBM Rules. Slippage is also feared in growth and inflation targets envisaged in the budget. The GDP increase is pitched lower at 6 to 6.5 per cent and annual inflation higher at 6.5 per cent according to the Reserve Bank of India mid term assessment.

Fiscal soundness is not a question of mere numerical deficit targets. Deficit reduction is to ensure that government borrowings are within sustainable limits and the borrowed funds are used productively for development and creation of capital assets. This implies that revenue is mobilised properly and expenditure managed efficiently. A whole lot of measures and steps are needed to support the FRBM Act. The budget and the mid year review raise many issues of serious concern relating to fiscal policy and management.

According to the Medium Term Fiscal Policy (MTFP) the bulk of the fiscal correction to reduce the deficit is to be achieved by improving tax revenue. The budget aims to reduce the fiscal deficits largely through deeper tax reforms and not by expenditure reforms. Even this one-sided strategy is not reflected in the budget. The budget speech admits that it will be unwise to attempt any tax reform in a hurried or piecemeal manner and such reform can be attempted only in the next budget. The changes in direct taxes are estimated to yield an additional Rs. 2,000 crores while the indirect tax proposals are revenue neutral.

In spite of this the gross total tax revenue has been projected at Rs. 317,733 crores for 2004-05, an increase of Rs. 62,810 crores or 24.6 per cent over the revised estimate for 2003-04 based on expected buoyancy. This is an unrealistic assumption . The mid term review and lower GDP growth estimates confirm the weaknesses of budgetary revenue projections. The deterioration is compounded by post budget reductions in customs duties. Actual collections of tax arrears have not been significant especially over what was done in the first six months last year.

Austerity only on paper

The bulk of the fiscal correction attempted is sought to be achieved by larger revenue assumption and not through reduction of non-priority expenditure and expenditure management. The austerity instructions and corrective steps announced in September are a rehash of routine annual exhortations to ministries. Non-Plan expenditure has not been reviewed and pruned. . The recommendations on economy in government by the Fifth Pay Commission and the Expenditure Commission are yet to be considered and implemented.

Subsidies are another specific example of major non-Plan expenditure pending review. The Government intends to take up an intensive review of operational aspects of the subsidies for better targeting. Policy issues like guaranteed procurement at minimum prices and diversification of crops, which determine the food subsidy, have not been addressed. Regarding diesel and LPG subsidies, it has merely been stated that international crude prices are under close watch and equitable sharing of the burden will be ensured among consumers, oil producers and the Government.

Hasty and inadequate project preparation, poor project implementation and lack of sustained funding have led to cost and time overruns in schemes and projects. The budget does not touch upon this vital issue except for a cryptic reference that "greater emphasis on financials rather than on outcome has led to serious shortcomings in realising the development objectives.'' A glaring example of hasty announcement of a costly and difficult capital project is the proposed desalination of water for Chennai at an estimated cost Rs. 1,000 crores. This is an underestimate as other costs like captive power plant and transmission pipes will be extra. There is no word on technical feasibility, the high operational cost due to the power intensive process and the funding pattern.

The ills of the public sector undertakings are well known, especially their dependence on the Government for Plan and non-Plan loans and equity. Here again, the answer in the budget is further study. A Board for Reconstruction of Public Sector Enterprises is to be set up to advise on reconstruction and disinvestment. Meanwhile, it is more of the same for the current budget including the baling out of sick units. Disinvestment has totally slowed down as evidenced by the slippage in the budgetary target.

The Railways continue to be a drain on the general budget. Cross subsidy of passenger fares by freight, estimated at Rs. 4,000 crores annually, is a populist approach and makes no economic sense. Here again the problem is lack of action on the findings of the Rakesh Mohan committee.

The budget and the Medium Term Fiscal Policy, which do not address basic revenue and expenditure issues, make for poor implementation of the FRBM Act.

The deficit targets in MTFP are not backed by any data on revenue and expenditure. If this is not rectified in the next budget the Act will remain a statutory nuisance and not a useful tool. The Government should bring out a White Paper on the subject.

A. Rangachari

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