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Central budget sidelines Fiscal Responsibility Act

Misleading claims of revenue deficit reduction

— FILE PHOTO

HIGH EXPECTATIONS: Industrialists watching the Union Budget 2007-08 on a big screen.

The Economic Survey 2006-07, which preceded the latest Central budget, warned against the temptation of fiscal profligacy. It stressed the need for fiscal prudence. One, therefore, looked for concrete steps in the budget for fiscal consolidation. The Finance Minister in his budget speech said, “I am happy to report that we are on course to achieve the Fiscal Responsibility and Budget Management Act (FRBM ) targets.”

He has claimed that fiscal consolidation is proceeding according to the FRBM Act. But going through the massive and complex budget documents with fine prints, one is unable to share the Minister’s self-congratulatory optimism. The ‘achievement’ of FRBM targets raises problems over the credibility of numbers and continued non-action on many fronts of fiscal management.

The revenue deficit and overall fiscal deficit targets in 2007-08 are shown to be 1.5 per cent and 3.3 per cent of the GDP (Gross Domestic Product), on course to zero revenue deficit and three per cent fiscal deficit by 2008-09 as per the FRBM Act. But many large items of expenditure have not been included in the budget.

One example is the gross understatement of petroleum subsidy, that is, the burden borne by the Government in asking the oil companies to supply LPG (liquid petroleum gas) and kerosene to consumers below cost. The budget provision for petroleum subsidy in the revised estimate for 2006-07 is Rs. 2,785.43 crore (reduced from the budget estimate of Rs. 3,080 crore) while the budget estimate for 2007-08 is Rs. 2,840 crore. This is a blatant understatement considering the skyrocketing import price for crude oil.

The device adopted is to shift the burden temporarily to the oil marketing companies by issuing special oil bonds to them, thus deflecting the expenditure from the budget. Nowhere in the budget documents are any figures given of the total amount of such bonds issued till now. But a press report on the earlier Cabinet decision said the estimate was Rs. 73,500 crore of bonds to cover underrecovery in 2006-07, later revised to Rs. 50,000 crore in February. This violates the basic principle of cash budgeting underlying government budget estimates.

Another example are the special bonds for Rs. 16,000 crore issued to the Food Corporation of India, a government undertaking, for foodgrains lifted from it for different relief schemes of the government but not paid for.

If one adds these sums to expenditure estimates for 2007-08 as one should, the true revenue deficit will far exceed the target fixed in the Act. There are other instances of special bonds issued earlier, for example, those for bailing out public enterprises like the Unit Trust of India and the IDBI.

The shortcuts to show achievement of numerical deficit targets exact a price. The Government has to pay interest on these ‘borrowings’ (Rs. 4,740.16 crore in 2007-08). The bonds and special securities issued are time bombs for expenditure outgo when they mature. More worryingly, they generate complacency and remove any sense of urgency in carrying out basic reforms in fiscal policy and management, which alone can lead to fiscal consolidation.

Tackling long pending concerns in revenue mobilisation and expenditure management and restricting borrowing to finance only priority and productive expenditure will help fight inflation, support currency convertibility and free the RBI to follow appropriate monetary policy. The list of such issues is long and well known and reiterated in these columns many times in the past. Numerous studies and committees and commissions have gone into these and made specific recommendations. What is needed is the will to act.

The revenue reforms include reduction/elimination of tax exemptions and giving better focus by treating the revenue forgone as tax expenditure, improving efficiency of tax collection, including the arrears and stable medium term tax rates avoiding annual tinkering.

On the expenditure side, reform areas include cutting out non-essential and unproductive activities, schemes and projects, allocation of resources to priority areas, reducing cost of services, elimination of hidden subsidies and rationalising merit subsidies, reduction of time and cost overruns on projects, getting proper ‘outcome’ from output and outcome budgeting, supporting medium-term three-year fiscal policies with credible and disaggregated data based on valid assumptions like oil prices, contingent provision for the Sixth Pay Commission for government servants, closure of sick and unviable PSUs (public sector units), privatisation and reducing the PSU burden on the budget and removing the populist subsidy of railway passenger fares by freight charges which contribute to inflation.

The traditional inertia to fiscal reform is aggravated by the disparate coalition partners in the UPA Government exerting pressures to suit their political agenda. Some examples of recent actions and inaction, selected at random, which are not justifiable on any sound fiscal grounds, can be cited.

Bengal Chemicals and Pharmaceuticals, a public sector undertaking, has been baled out by a Cabinet committee approval of a revival package for Rs. 207.19 crore, including fresh equity, interest free loan and payment of wage arrears. This PSU has been a sick unit from January 1993. Partial disinvestment of government shares in Neyveli Lignite Corporation has been given up due to opposition from a constituent party in the UPA coalition. Hindustan Photo Films, a PSU in Tamil Nadu, is allowed to continue though it is more or less dead and defunct owing to outdated products and competition from new players. Closing the unit will pose another problem as it has bad debts of Rs. 1,700 crore due to the State Bank of India which advanced the loan collateral free as it is a government company.

To conclude, we have to draw up a practical code of fiscal conduct which should serve as the basis for achieving the deficit targets. The Fiscal Responsibility Act has to be implemented in letter and spirit for beneficial fiscal consolidation.

RANGACHARI ARAVAMUDHAN

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