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QFAs blamed for deficiency in fiscal transparency

MUMBAI, JULY 4. The advisory group on fiscal transparency, constituted by the Reserve Bank of India, has said that the most important deficiency relates to the prevalence of quasi-fiscal activities (QFAs) undertaken by the banking system and by non- financial public sector enterprises, which are not transparently identified and quantified.

The RBI has greatly reduced the scale of QFAs in which it engages. The main QFA at present is that it continues to provide direct support to government securities (G-secs) at the primary issue stage, to limit the impact of government borrowings on market interest rate for G-secs, the group, headed by Mr. Montek Singh Ahluwalia, said.

However, the Fiscal Responsibility and Budget Management Bill (FRBM) proposes ending this practice at the end of three years. The group which submitted its report in June has recommended implementation of this proposal, according to an RBI release here today.

Public financial institutions (mainly commercial banks) engage in significant QFAs in the form of direct lending to the priority sectors. However, the scale of the QFA involved (the implicit subsidy) is not identified even in the annual reports of the banks. Transparency requires that this should be done, though the group recognises that in practice, quantification of implict subsidy would be difficult.

The non-financial public sector enterprises also engage in significant QFAs which are not quantified. There are practical difficulties in quantifying these activities too, the group felt.

The group said perhaps the most important QFA in this context is the operation of the oil pool account, which has allowed large deficits to pile up. The proposed abolition of this account with the dismantling of the administered price mechanism in April 2002, after which date any explicit subsidisation of particular groups of oil consumers would have to be borne directly by the budget, was desirable on transparency grounds, it said.

If the oil pool account was not abolished for any reason, the deficit incurred on this account should be reported in budget documents in the interest of transparency, it added.

On open budget preparation, execution and reporting, the group said there was no system of mid-year reporting to Parliament at present. However, this deficiency would be addressed by the Fiscal Responsibility and Budget Management Bill (FRBMB), which proposes a system of quarterly reporting on the aggregate budget out-turn. This would provide continuous review of the fiscal out- turn in the course of the year, the group said.

The group, one of the ten constituted by the Standing Committee in December 1999, said the current fiscal practices at the Central Government level satisfy the minimum requirements of the IMF's `code of good practices on fiscal transparency' in many areas.

Though there are deficiencies in some important areas, many of those would be substantially addressed once the FRBMB is enacted, the group said.

States asked to improve practices

Fiscal practices at the State level, however, were felt to be generally behind the standards achieved at the Central Government level.

The group recommended that the States which have already started publishing `Budget at a glance' may be persuaded to disseminate more information on time series basis, especially data on major fiscal indicators.

In the medium term, States should be encouraged to move towards publishing a `budget summary' in the format suggested by the Planning Commission.

The group said the Finance Secretaries Forum could review the report of the Advisory Group on Fiscal Transparency and determine a set of minimum standards, which all State governments should achieve within a three-year period.

The group has also recommended that in the interest of transparency, the institutional table for India in government finance statistics of the International Monetary Fund, should be revised to make it comparably detailed with the entries for other countries.

Another area of concern relates to the issue of transparency in tax laws. Although the principle that taxation must be levied on the basis of explicit legal authority is strictly complied with, "our tax laws are lacking in transparency".

A major effort at simplification, and greater use of information technology, especially electronic filling, was urgently needed, the group said.

The Government involvement in the private sector through regulation and equity ownership is exercised on the basis of clear legal authority. However, the criteria to be used in the exercise of executive authority are not always very clear.

The group said the Organisation for Economic Co-operation and Development recommendations relating to characteristics of transparent regulations be treated as indicators of best practices and existing rules and regulations be systematically reviewed in the light of these guidelines. The recommendations contained in this report are the product of independent evaluation and assessment of standards and codes undertaken by non-official experts, and do not reflect the views of the RBI, the Government of India or any other regulatory agencies concerned.

- PTI

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