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Finance panel to suggest fiscal accounting for oil, other bonds

Special Correspondent

The Commission is scheduled to submit its report on October 31

NEW DELHI: The Union Cabinet on Thursday entrusted the 13th Finance Commission with an additional task of charting out a road map for fiscal adjustment following the inclusion of off-budget subsidies on oil, food and fertilizer bonds estimated at over Rs. 100,000 crore in the budget.

To facilitate this exercise, the Cabinet approved the insertion of an additional clause in the terms of reference of the Finance Commission, which said: “Having regard to the need to bring the liabilities of the Central Government on account of oil, food and fertilizer bonds into fiscal accounting, and the impact of various other obligations of the Central Government on the deficit targets, the Commission may review the road map for fiscal adjustment and suggest a suitably revised roadmap with a view to maintaining the gains of fiscal consolidation through 2010 to 2015.”

The Commission, headed by Vijay L. Kelkar, is scheduled to submit its report to the Government for a five-year period (2010-2015) on October 31.

In his speech while presenting the budget for the current fiscal, Finance Minister P. Chidambaram had conceded that the Centre’s fiscal and revenue deficits were understated to the extent that its liabilities on account of oil, food and fertilizer bonds were off-budget.

Noting that there was a need to bring these liabilities into fiscal accounting, he had said: “As a first step, I have shown these liabilities clearly in ‘Budget at a Glance’... I intend to request the 13th Finance Commission to revisit the roadmap for fiscal adjustment and suggest a suitably revised roadmap.”

Prevailing practice

Under the prevailing practice of off-budget accounting for oil, fertilizer and food bonds, the fiscal consolidation targets require the Government to cut the fiscal deficit by 0.3 per cent each year to peg it at three per cent by the end of 2008-09 while reducing the revenue deficit by 0.5 per cent so as to eliminate it by end of the current fiscal. As per budget estimates, the revenue deficit is projected to decline to one per cent of the GDP (gross domestic product) at Rs. 55,184 crore this fiscal, while the fiscal deficit at Rs. 1,33,287 crore is to work out to 2.5 per cent of the GDP.

However, in its quarterly monetary policy review on July 29, the Reserve Bank of India warned the Government against the country’s deteriorating fiscal position, mainly on account of the rising off-budget liabilities, expenditure on subsidies, the farm loan waiver and the likely implementation of the Sixth Pay Commission recommendations during the current fiscal year.

The apex bank went on to add that since the fiscal deficit may go up beyond budget estimates owing to such off-budget liabilities and increased expenditure on subsidies, loan waivers and salaries during the year, the fiscal developments warranted “close and careful monitoring” as its fall-out would also be on inflation and external sector management.

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