Fiscal Policy Rules for India?

Author(s): George Kopits

Source: Economic and Political Weekly, Vol. 36, No. 9 (Mar. 3-9, 2001), pp. 749-756
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4410348 .
Accessed: 05/01/2015 18:51

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to
Economic and Political Weekly.

http://www.jstor.org

This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM

All use subject to JSTOR Terms and Conditions
 bpecial articles

Fiscal Policy Rules for India?

This paper assesses the potential usefuilnessof fiscal policy rules for India, in the light of
rapidly growing international experience in this area. As part of this assessment, it explo'res
various design options and institutionalarrangementsthat seem relevantfor India, in the
context of the Fiscal Responsibilityand Budget ManagementBill. To conclude, the paper
outlines preparatory steps for successful implementation.
GEORGEKOPITS

he Fiscal Responsibility and the context of the bill. To conclude, it economicgrowthremainsbelowits poten-
BudgetManagementBill of 2000, outlines preparatorysteps for successful tial rate.4Moreover,the debt burdenis
recentlysubmittedto parliament, implementation. compounded bytheproliferation of govern-
representsan importantstep toward a ment guarantees,especially at the state
frameworkof sustainabilityfor India's Background level, andwith the prospectiverestructur-
publicfinances.The bill envisages a set ingof weakstate-ownedbanks.Thus,India
of permanentfiscal policy rules thatwill Over the pastcouple of decades- not- faces a significantweakeningin public
requirethecentralgovernment(following withstandingperiodicadjustmentefforts debt sustainabilityin the future, in the
presetconvergenceperiods)to eliminate - the conductof fiscal policy in Indiahas absenceof acomprehensiveandprolonged
therevenuedeficit(orratherbuild a revenue beencharacterised by a strongdeficitbias, fiscal retrenchment.
surplus)and to target an overall fiscal evidencedby a public sector imbalance In additionto the well known overall
balance(subjectto a deficitlimit of 2 per around10percentof GDPatpresent.This adverseeffect of public sector dissaving
cent of GDP) as of 2006; to limit yearly is attributable notonly to thedeficitof the on capitalaccumulationand on growth,5
issuanceof guaranteesto 1/2 per cent of central government,but also to rising the repercussionsof the deficit bias and
GDP;to reducetotal liabilitiesto 50 per deficits of the state governments.Public high public indebtedness on the real
centof GDPby 2011; andto abstainfrom sectordeficitshave been symptomaticof economy can be tracedthroughspecific
borrowingfromtheReserveBankof India a numberof adversefactors:a mounting channels.As observedin othercountries
effective 2004. In addition,the bill pre- wagebill,widespreadsubsidies,prolifera- as well, the rise in real interestratesas-
scribessubmissionto parliamentof yearly tionof taxconcessions,andrisinginterest sociatedwitha highpublicsectorborrow-
statementson medium-term fiscal policy, costs. These developments have been ing requirement(even when it finances
thefiscalstrategy,andthemacroeconomic aggravatedby weaknessesin the system public investment)tends to crowd out
framework,as well as of quarterlyreports of intergovernmental relations,including privateinvestment.6Perhapsless overtly,
on fiscal developments.Additionaltrans- insufficientincentivesfor revenueraising quasi-fiscal activities, including cross-
parencymeasuresinvolveaccountingstan- andforexpenditurecontrolatthestateand subsidiesthroughdirectedand preferen-
dards,disclosureof contingentliabilities, local levels. tial creditfacilities,contributeto a signi-
and otherreportingrequirements. Largedeficitshave led to a rapidbuild ficanttaxwedgeon financialtransactions.
The immediaterationalefor the bill, as up in India'spublicsectordebt,which,in Similarly,explicit and implicitsubsidies
explainedby financeministerSinha,is of excess of 80 per cent of GDP, standsas - in part throughbelow-cost pricing of
"settingup a stronginstitutionalmecha- one of the highest in emergingmarkets publicservices7- createsignificantallo-
nism to promoteoverallfiscal prudence" (see Figure).2Inthepast,low interestrates cativedistortions.To be sure,thissituation
and"removingimpedimentsto the effec- and non-marketsourcesof financing,in shouldnotbe correctedwiththecompres-
tive conductof monetarypolicy anddebt combinationwith high economicgrowth, sionof infrastructure expenditureorintro-
management." Moregenerally,it is seen helpedmoderatetheeffectof largedeficits ductionof distortionary taxmeasures- an
as a meansto ensuringintergenerational on the rise of the debt-GDP ratio. In approachoften followed in Indiato con-
equity, long-termmacroeconomicstabi- particular,the average interest cost of tainbudgetdeficitsin the past- thattend
lity, and growthfor India.l borrowinghas remainedbelow the eco- to stifle economic activity.
While forgoingan exhaustiveevalua- nomic growthrate owing to relianceon On the externalfront,continuedfiscal
tion of the bill, this paper assesses the concessional financing from abroad,as imbalanceswill renderIndiavulnerableto
potentialusefulnessof fiscal policy rules well as to financialrepressionat home.3 balance-of-payments crises which would
for India,in the light of rapidlygrowing However,the debt dynamicsare likely delivera majorsetbackto its development
internationalexperiencein this area. As to worsenas thescopeforlow-costfinanc- prospects.Intheyearsahead,thisriskwill
partof thisassessment,it exploresvarious ing narrowswith continuedhigh public rise significantlyas the externalcapital
design optionsand institutionalarrange- sectorborrowingrequirement andstepped- and currentaccountsare liberalised,and
ments that seem relevant for India, in upliberalisation of financialmarkets,while Indiabecomes moreexposed to shifts in

Economicand PoliticalWeekly March3, 2001 749

This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM

All use subject to JSTOR Terms and Conditions
 Figure: Emerging Market Economies - Gross Public Debt, End-1999 useful to raise awareness about the cost
(As a percentage of GDP) of tax subsidies. Notably, over the past
decade, many countries have made con-
* Ecuador _ : XE:E:' " ; E :; ;: E; siderable progress on all these fronts to-
ward greater institutional transparency,
* Philippines 3/ ::-i:.;::::: : even in the absence of fiscal policy rules.13
* R ussia 2/ ?-7:! ::::.: ::: ::: Equally importantis transparencyin fiscal
reporting through comprehensive, timely,
* Indonesia 2/ .:..::--,:::- frequent,anddetailedgovernment reporting
(based on appropriate accounting stan-
India dards), as mandated for compliance with
fiscal policy rules in New Zealand, Brazil,
Hungary 1/ 3/ . :: ::: - and the European Union (EU).14
For India, fiscal transparency would
* K orea -:: :: : :::::: :; ::; require greater clarity in the delineation of
the public sector and its components. This
*Thailand 1/ : ::: : :: ::.: : includes an open, arm's-length relation-
* Brazil - : .: - :. I ship between government, on one hand,
and public utilities and the so-called public
* M exico :: : ::: ;:i-- - : - : accounts (consisting of provident funds
and small saving deposits managed by the
Argentina :::::- X f; government on a fiduciary basis), on the
other.15By implication, public utilities and
Poland :::::::: I financial instruments are not to be used as
vehicles for implicit government subsi-
* Czech Republic 3/ 7:-7::71 dies. Similarly, clarity is necessary in inter-
governmental fiscal relations - including
0 20 40 60 80 100 120 140 in the nature and terms of financial rescue
Notes: * Indicatesa countrythat has experienceda currencycrisis (insome cases incombinationwitha operationsof states in distress by the central
bankingcrisis) since 1994. government.16 As regards accounting
1/ Estimate. practices, it would be advisable to shift to
2/ Centralgovernment. an accrual-based approach, along with
3/ Generalgovernment. consistentandtimelymeasurementofpublic
sector liabilities.17 In addition, it will be
investor sentiment. As shown by the ex- Need for Transparency necessary to distinguish clearly between
perience of a number of emerging market current and capital expenditures. Such
economies in the 1990s, in an open An indispensable ingredient of fiscal steps - presumably to be undertaken
economy, largefiscal imbalances- whether responsibility legislation is transparency through delegated legislation under the
in the form of actual or prospective budget in institutional arrangements and fiscal bill - should greatly contribute to the
deficits - and public sector indebtedness reporting,10whetherin the context of rules- credibility of India's fiscal policy, and
can contributeto currencycrises.8 Notably, based fiscal policy, as in the case of New particularly of its proposed fiscal rules, in
India's public sector debt ratio exceeds the Zealand,or of discretionarypolicy-making, financial marketsand among the electorate.
debt ratio of a number of countries that as in Australia.11 In particular, the need
have suffered such crises in recent years for transparency is underscored in the Design Issues at the
(see Figure). application of fiscal policy rules in order NationalLevel
In these circumstances, the promotion of to counter pressures for engaging in cre-
capital formation, maintenance of market ative accounting and operatingprocedures In a number of countries, facing a large
confidence, and high sustained growth, to comply formally, but not in fact, with public debt burden, a major objective of
require formulation of a broad strategic preset performance indicators.12 fiscal policy rules is to reduce the public
approach at fiscal consolidation - with The effectiveness of fiscal policy rules debt ratio and then to stabilise it at a
close attention to the quality of adjust- hinges on transparency in institutional prudentlevel. Whereas in Brazil and New
ment. A central aspect of such a strategy structure and functions, that is, in the Zealand the government in power is re-
is the adoption of a permanent framework relations within the public sector, as well quired to set a medium-term ceiling for the
for a rules-based fiscal discipline, as pro- as the relations between the government public debt ratio, EU members, under the
posed underthe Fiscal Responsibility Bill.9 and private sector entities. Transparency Economic and Monetary Union (EMU),
For similar reasons, a number of open serves to contain or reduce quasi-fiscal are subject to a limit on the gross debt of
emerging marketeconomies have recently activitiesthroughcovertsubsidiesat below- the general government equivalent to 60
introduced fiscal rules in the context of cost pricing or government guarantees - per cent of GDP (Table). By comparison,
such legislation (Argentina, Brazil, and often used as a substitute for explicit in India, the bill sets a limit of 50 per cent
Peru) or are considering doing so in the budgetary operations. Likewise, regular of GDP on total liabilities of the central
future (Chile, Colombia). publication of a tax expenditure budget is government.

750 Economicand Political Weekly March3, 2001

This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM

All use subject to JSTOR Terms and Conditions
 In general,the gross liabilities of the
consolidatedpublicsectoris widely seen
as the most meaningful measure of a
country'spublicdebt. Financialmarkets
tendtoassessdefaultriskontheoutstanding
debtof thepublicsectoras a whole,rather
thanjustthecentralgovernment,giventhe
implicitguaranteeprovidedby thecentral
government totherestof thepublicsector.18
Also,a grossconceptis preferredsincethe
marketability andvaluationof government
assets - with the notable exception of
foreignexchangeassets- usuallyis open
to question.
A fiscal rulethatestablishesa medium-
termlimiton thegrossdebt-GDPratiocan
providea broadgaugeof fiscal rectitude,
whereasa rule that seeks to set year-to-
yeardebtceilingsis unlikelyto be credible
or operationally effective.Since measures
of public indebtedness(especially as a
proportionof GDP) are usuallyexposed
to valuationchanges and other factors
beyondthecontrolof the authorities,they
are difficultto treatas an annualopera-
tional target.
The bill is adequateon both counts,
namely, as regards the comprehensive
measure of total liabilities19 and the
medium-timehorizon for compliance.
However,it is exposed to two potential
shortcomings:the limited institutional
coverage(encompassingonly the central
government)andthelevel of thedebtlimit
(as compared to debt limits in other
emerging-market economies)whichdoes
not seem sufficientlyambitiousgiven the
stageof developmentof India'sdomestic
financialmarkets.20
In anyevent,a moreeffectiveruletypi-
cally is one thatis definedwith respectto
a comprehensiveflow indicatorof fiscal
performance, such as the budgetbalance.
To enhanceits effectiveness,the indicator
needsto be operationallysimple,flexible,
andgrowth-oriented - withobvioustrade-
offs amongthese criteria.21Operational
simplicityrequiresthattheindicator,while
consistent with the above mentioned
medium-term debttarget,be amenableto
monitoringand control during budget
execution.This criterionis met by the
overallbalancerequirementin Argentina
and by the overall deficit limit in Peru.
Along similar lines, for India, the bill
requirestargetingboth a currentsurplus
andan overallbalance(knownin Indiaas
revenuesurplusandfiscalbalance,respec-
tively), subject to a limit of 2 per cent
of GDP on the overall deficit, for the
centralgovernment.It canbe arguedthat,
Economicand PoliticalWeekly March3, 2001
This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM
foroperationalpurposes,theserulescould
be usefullysupplementedwith an obliga-
tion to maintaina minimumprimarysur-
plus (excludinginterestexpenses,beyond
the immediatecontrolof the authorities),
consistentwiththedesiredreductionin the
debt ratio.22
Ideally, the flexibility criterionwould
be served by an indicatorof cyclically
adjustedbalancethat accommodatesthe
effectsof automaticstabilisersaroundtrend
GDP growth,requiringa budgetsurplus
duringabove-trendgrowthand allowing
deficits duringbelow-trendgrowth- as
proposedfor the federalgovernmentin
Switzerland.23 At a morepracticallevel,
a similarsolution(albeitasymmetricwith
respectto thecycle) couldbe achievedby
requiringmaintenanceof overallbalance
or surplusover the cycle but subjectto a
presetdeficit limit, as in the case of EU
membersunderthe StabilityandGrowth
Pact,sufficientto accommodate theimpact
of amajorrecession.24 Analternative would
be to requirean overallbalanceor surplus
over the cycle, as in New Zealand,but
withoutspecifyinganylimits;thisapproach
providesscope not only for the operation
of automaticstabilisers,butalsofordiscre-
tionarycountercyclical action.Yetanother
option would consist of mitigatingthe
effect of exogenousshockswith accumu-
lation(drawdown)of reservesin (from)a
contingencyfundin theeventof anupturn
(downturn)in activity,as envisagedunder
the fiscal rules recentlypromulgatedin
ArgentinaandPeru,muchlike in thecase
of some state governmentsin the US.
In India,the bill allows for deviations
from the rule on groundsof unforeseen
demandson the budget"dueto national
securityornationalcalamity".Apparently,
the authoritieswould be left with ample
discretionto interpretthisescapeclause,25
riskinga possibleloss of credibility.This
couldbe avoidedby formulating,through
delegated legislation, a more objective
determinationof how to accommodate
exogenous disturbances by choosing
amongtheoptionsoutlinedabove,namely:
targeting a cyclically-adjustedcurrent
balance;settingloweranduppermargins
arounda trendgrowthpathto determine
required/alloweddeviations around the
targetbalance;or by establishinga con-
tingency fund to mitigatethe effects of
exogenous shocks.26The bill resembles
the first option, followed in the EU, for
it prescribesa targetsubjectto a deficit
limit;however,suchanapproachcouldbe
onerous.27
All use subject to JSTOR Terms and Conditions
A growth-orientedindicatorseeks to
avoidplacingan undueburdenof compli-
ance with the rule on cuts in government
investmentspending- a highlyundesirable
outcome,given highexpectedsocialrates
of returnon infrastructure projects.This
can be accomplishedwithmaintenanceof
currentbalance,undertheso-calledgolden
rule,appliedin the majorityof US states,
and in Germanyand Brazil at both the
federal and state-levels. More appropri-
ately,underaccrualaccounting,thegolden
rulein New Zealandprescribesoperating
balance.28Whereas cash-based current
balancepermitsborrowingtofinancegross
investment expenditures,accrual-based
operatingbalanceallows borrowingonly
for investmentnet of depreciation.
In India,the golden rule, envisagedin
the bill, seems appropriatefor several
reasons,in additionto its growthfriend-
liness. First,given India'srelativelyhigh
potentialgrowthrate,overtimethecurrent
balancerule would lead to a significant
reductionin the debt ratio. Second, it is
both simple and visible given the fami-
liarity of the currentbalance (revenue
balance) concept. Third, many capital
projectsarefinancedatconcessionalterms,
chieflyfromofficialexternalsources,and
are vitally needed to promote growth.
Nevertheless,compliancewiththecurrent
balancerequirement, expenditureon these
projectswouldbeprotecteduptoanamount
equivalentto about2 percentof GDP(the
limiton theoverallfiscaldeficit);atworst,
when both currentbalance and overall
balanceobtain,investmentspendingwould
collapseto zero. (This apparentanomaly
needs to be eitherclarified,or corrected
by droppingaltogethertheoverallbalance
requirement.)As a corollary,the current
balance obligation would eliminate the
present incentive, especially for state
governments,to meet fiscal adjustment
targetsby squeezingcapitalexpenditure
but withoutsacrificingwage payments-
whichareoftenpoliticallymoresensitive.
To counterthis latterincentive,it would
be useful to buttressthe golden rule with
an additionallimit on the wage bill, as
done in Brazil.29
However,cautionis neededto prevent
the leakages (by financingcamouflaged
currentexpenditure)associatedwith the
goldenrule,whichhavebeenso prevalent
in Germanyandin some US states.Speci-
fically, it is necessaryto follow a trans-
parentandunambiguous, yetoperationally
sensible, definition of what constitutes
capital expenditure.30Thus, far more
751
preferablewouldbe to shiftto the operat-
ing balance requirement,followed in
New Zealandunder accrualaccounting,
whichobviatesmeasurementrefinements
and has a smoothingeffect on the fiscal
outcome.
Subjectto this caveat,the rules should
operatein a mannerthat precludesover
identification.Accordingly,the balanced
budgetruleshouldoperatewhenthe debt
ratio limit has been met. Otherwise,as
notedabove, in periodswhen the actual
debt ratio exceeded the maximumdebt
ratio,the governmentwould be required
to generatea primarysurplusthatwould
be consistent with convergence to the
prescribedlimit on the debt ratio.
Design Issues at
SubnatlonalLevel
A fundamental issue to be addressedin
a federalsystemis theapplicationof fiscal
rules at the subnationallevel of govern-
ment.Thecase forrulesat the subnational
levelis particularlystrongwhena country,
suchas Brazil,is confrontedwith a major
fiscal adjustmenttask thatcannotbe met
by the centralgovernmentalone. Like-
wise, especiallyin a federalsystem with
a small centralor supranationalgovern-
ment,as in theEU, it is necessaryto apply
subnational rulesso asto counterthemoral
hazardthatmay ariseamongsubnational
governments(or nationalgovernmentsin
the EU) to incurfiscal imbalanceswith
repercussionson the borrowingcosts of
the rest of the system. The fundamental
principleunderlyingthese argumentsis
thatrules- and more broadly,fiscal re-
sponsibilitylegislation- need to be ap-
plied at the locus of accountabilityfor
policy-making, thatis, theymustbeplaced
onthecorresponding level of government.
Thisrecognisesthat,whereasin a unitary
systempolicy formulationand decisions
takeplace only at the nationalor central
level,inafederalsystemtheyaredispersed
amongthenationalandsubnationallevels.
In federalsystems,thereare two basic
approachesto fiscal responsibility,andin
particular,to fiscal rules.31Under the
autonomousapproach,the initiative for
establishingrules arises from individual
subnationalgovernments.Followingthis
bottom-upapproach,in Canada,Switzer-
landandtheUS,manysubnational govern-
ments assumeda balanced-budgetrule,
enforced with varyingdegrees of strin-
gency,32while othersretaineddiscretion-
arypolicy-making.By andlarge,in these
countries,subnationalgovernmentshave
752
This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM
directaccess to financialmarketsto meet
theirborrowingrequirements, andthereis
rarelya precedentof bailoutsof insolvent
subnationalgovernmentsby the national
government;hence;theirdesireto main-
tain a good creditratingin the markets.
By contrast,underthe coordinatedap-
proach,all subnationalgovernmentsare
subjectto uniformrulesto ensurea degree
of fiscal disciplineunderthe surveillance
of a centralauthority.For the most part,
this top-down approach is introduced
againstthebackgroundof pastbailoutsor
under some form of implicit or explicit
guaranteesto rescuesubnationalgovern-
ments in distress.Coordinationalso be-
comesnecessaryinfederations(orconfed-
erations)where lower levels of govern-
mentareresponsiblefor the bulkoffiscal
activity, with considerable potential
spilloversfrom the misbehaviourof one
government ontheriskpremiumof another
governmentwithin the federal system.
Perhapsthe strongestargumentfor this
approachis the need to bring about a
lastingfiscaladjustment encompassingthe
entiregeneralgovernmentorconsolidated
public sector, in the face of a possible
sustainabilityproblemwith likely reper-
cussions on countrywiderisk premium.
An earlyillustrationof this approach-
thatresultedfroma majorbailoutepisode
- was the informalagreementamongthe
Australianstates, later formalisedunder
the authorityof the LoanCouncil,setting
borrowinglimits on the states.33Other
exampleswherelower-levelgovernments
aresubjectto statutorydebtlimitsinclude
Brazil,Colombia,EU members,andCFA
franczonemembers.Ineachof thesecases,
a statutorydebt or borrowinglimit is set
as a proportionof revenueor GDP of the
jurisdiction.34 In an interestingvariantof
thispractice,in Brazil,consistentwiththe
medium-termtargetdebt-GDPratio (set
bythesenate,uponrecommendation of the
president)forthepublicsectoras a whole,
each level of governmentis assigned a
uniformlimit for its debt-revenueratio,
implyinga fiscal adjustmentfor state(or
municipal)governmentswhose ratioex-
ceeds the limitset for all state(or munici-
pal)governments. Inaddition,all Brazilian
statesandGermanLanderarerequiredto
followthegoldenrule;similarly,EU mem-
ber countriesare committedto maintain
overallbalance,subjectto thedeficitlimit.
A key distinctionbetweenthe two ap-
proaches- arisingmainlyfromtheimplicit
orexplicitbailoutprovision,presentin the
coordinatedapproach35- is that, while
Economicand PoliticalWeekly March3, 2001
All use subject to JSTOR Terms and Conditions
under the autonomous approach each
subnationalgovernment seeks to gain
credibilityfor its own fiscal policy, under
the coordinatedapproachthe goal is to
establishcollectivecredibilityfor macro-
economic policies - that is, not only for
fiscal policy, but also for the monetary
stanceof the federation.Given the diffu-
sion of effortamongsubnational jurisdic-
tions to achieve collective credibility,as
opposedto individualcredibilityfor each
jurisdiction,the incentive for free-rider
behaviourby circumventingthe ruleshas
been far strongerunderthe coordinated
approach.Therefore,greateris theneedto
introducesanctionsfornoncompliance (see
below) and to create a mechanismfor
enforcingcorrectiveaction by the non-
complyinggovernment- in exchangefor
assistanceor waiverof finesby thecentral
or supranational authority- as envisaged
in Brazil,Colombia,the EU, or the-CFA
franc zone.
Undoubtedly,the above issues need to
be consideredin the context of India's
fiscal responsibilitylegislation.36On the
one hand,in view of a strongtraditionof
fiscal autonomyand of the magnitudeof
state and local jurisdictions,the autono-
mousapproach- implicitlyadoptedin the
bill, with no mention of state or local
jurisdictions- seems a logical choice for
India.On the other,the sheer size of the
requiredfiscal adjustmentat all levels of
government,a track-record of poorfiscal
performancein some states, as well as
mixedsuccess with pastbailouts(includ-
ing underthe MOUs),would arguefor a
coordinatedapproach.Moreover,thecen-
tralgovernmentretainsexplicitresponsi-
bilityfor approvalof all borrowingby the
state governments,with the exceptionof
borrowingfromthe postalsaving system
andprovidentfunds,andbyextrabudgetary
entities - such as 'special purpose
vehicles' aimed at fundinginfrastructure
and other projects.
Ina situationthatis comparableto India,
Brazil has opted for the coordinatedap-
proachand,in a mostambitiousundertak-
ing,introducedsimultaneouslyfiscalrules
at all levels of government.By contrast,
in an effort to find a satisfactory'
combi-
nationof the two approaches,Argentina
hasadoptedfiscal rulesat thefederallevel
withtheexpectationthattheprovinceswill
emulatethese voluntarily.37 However,at
the outset only a few smallerprovinces
adoptedsimilarrules. Subsequently, fearing
thatsomemajorprovincesmayundermine
the fiscal adjustmentundertakenby the
federalgovernment, financialmarketshave unless they stem fromexogenousshocks to set limits on borrowing or extending
becomescepticalof thefederalrulesto the covered by escape clauses or are offset guarantees.
point that the federal governmentwas withrecoursetoacontingencyfund.Under An additional institutional issue touches
compelledto assumea more active role this mechanism, revenue shortfalls or the authority responsible for the surveil-
in persuadingmostprovincesto introduce expenditureoverrunsthataregeneratedby lance and enforcement of the rule, as well
such rules and thus regaininvestorcon- the governmentor the legislaturewould as for the associated transparencyrequire-
fidence.An importantlesson,of potential be met with automaticcontingencymea- ments. In most cases, this function is
relevance for India, is for the central suresspecifiedtooffsetthebudgetary effect exercised by the audit office that reports
government to assumetheleadin adopting of the deviation.Such measurescan take to the legislature, though ultimate arbitra-
rules,with a clearunderstanding thatthe the form of automaticacross-the-board tion and judgment usually rest with the
subnationalgovernmentswill follow suit cutsin certainexpenditurecategories,40 or courts. In India, while in principle the
- especiallyif they wantto retainaccess the impositionof a uniformsurtax.For government is accountable to parliament,
to federalassistancein the eventof finan- India,albeitwithoutspecifyingthe nature the actual surveillance authority could be
cial difficultiesat the subnationallevel. of the contingencymeasure,the bill re- exercised (on behalf of parliament) by the
quiresthe governmentto takecompensa- Comptroller and Auditor General, whose
Budget Process tory action by curtailingaccess to the functions are specified under Art 148 ff
ConsolidatedFund in the event of an of the Constitution.
Over the past decade, an increasing unwarranted deviationfrom target,to be In a related matter, it is necessary to
numberof countries,especiallydeveloped detected throughquarterlyreportingof determine the nature and the extent of
ones, have been preparinga multiyear fiscal developments. sanctions for noncompliance with the rules.
macro-budgetary frameworkas partof the At the national level, sanctions usually
annualbudgetexercise. Althoughactual InstitutionalFramework consist of loss in reputation or adverse
procedures (intermsof thedegreeof detail, judicial decision - in some countries, in-
realism of underlying macroeconomic Largelydictatedbyjudicialprecedentor cluding penalties borne by the responsible
forecastsandpolicyassumptions,etc)tend tradition,thestatutorybasisof fiscalpolicy elected or appointed officials. However,
to varyamongcountries,such a medium- rules differs from country to country. in federations or confederations, financial
termprocessis an importantprerequisite Althoughusuallythe rules are enshrined sanctions may be levied by the national or
for a well-informedpolicy debate.38 in a law or in the constitution,in a few supranational government on the delin-
Inparticular, a rollingmultiyearmacro- cases theymaybe foundin administrative quent subnational or national government
budgetaryprocess is an essential ingre- or policy guidelines.If the rules affect a (non-interest-earning deposits under the
dientof effectivefiscalresponsibility legis- groupof countriesin a currencyunionor EU Stability and Growth Pact or the CFA
lation.In particular,it can confer credi- a confederation,they areprescribedin an franc zone; outright fines in Canada and
bilityto a fiscal policy rule since it alerts internationaltreaty(Table). In the case Colombia; suspension of transfers in
theauthoritiesandfinancialmarketsalike of India, it has been decided that the Brazil) or personal sanctions are imposed
as to the policy adjustmentsor reform most appropriatestatutoryinstrumentis on chief financial officials (criminal pro-
measuresthatmaybe necessaryfor com- legislation,mainlyunderthe authorityof ceedings in Brazil; salary cuts for cabinet
pliancewith the rule. More generally,it Articles292 and 293 of the Constitution members in a Canadian province).
disciplinespolicy-makersandensuresthat
they areaccountablefor adheringto bud- Table: Selected Countries - Summary of Fiscal Policy Rules'
get targets. For these reasons, the prepa- Rule/Country Effective Coverage2 Basic Escape Additional Statute4 Sanctions5
rationof medium-term budgetforecastsis Date Type3 Clause3 Rule3
an integralpartof fiscal policy rules and Budget rule
of associatedfiscalreportingrequirements Argentina 2000 NG DL CF EL L J
in Argentina,Brazil,New Zealand,Peru, Brazil 2001 NG, SG CB WL L J
Canada various SG CB L J
and EU members. EU members 1997 GG OB MY T F
In its presentformat,given its rigidities Germany 1949 NG, SG CB C J
andpartialcoverage,India's five-yearplan New Zealand 1994 GG OB
DL
MY L R
Peru 2000 NG CF EL L J
seems altogetherunsuitableas a rolling Switzerland various SG CB C J
multiyear macro-budgetaryprocess.39 UnitedStates various SG CB CF C, L J
However,the planningprocess could be Debt rule
revampedinto such a broadand flexible Colombia Brazil 2001 NG, SG SL L J
- 1997 SG PL L J
framework as proposedunderthe Fiscal EU members 1997 GG PL T J
ResponsibilityBill - in orderto focus the New Zealand 1994 GG SL L R
policydebatenotonlyonthepresentannual Notes. 1 Excludingprohibitionor limitson financingfromspecific sources.
budget,butalsoonthemeasuresthatwould 2 Generalgovernment(GG),national(central,federal)government(NG)orsubnational(including
be requiredto complywith the fiscal rule local)government(SG).
3 Budgetrulesconsist of overallbalance(OB),currentbalance (CB),orprescribedlimiton overall
over the mediumterm. deficit(DL)as a proportion of GDP,appliedon an annualbasis, except ifspecifiedon a multiyear
In addition,to ensurecompliancein the (MY)basis. Also, contingencyfund(CF)is providedin some cases. Additionalrulesconsist of
near term, it is necessaryto establisha limitson primaryexpenditure(EL)orwage bill(WL).Debtrulesare specifiedfora givenyear(SL)
or permanently(PL),as a proportionof GDP or of governmentrevenue.
mechanism toenforceamid-course correction 4 Contribution (C), legal provision(L),or internationaltreaty(T).
for unanticipated deviationsfromtarget- 5 Sanctionsfornoncompliance:reputational(R),judicial(J), or financial(F).

Economicand PoliticalWeekly March3, 2001 753

This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM

All use subject to JSTOR Terms and Conditions
 Theselasttwoissues,namely,thereferee- legislativeactionon rules.Similarly,sub- preparation andsequencing,includingthe
ing processand authority,and sanctions missionof theannualbudgetto parliament phase-inof supportingstructuralreforms.
aregiven limitedexplicit coveragein the in thecontextof a multiyearmacro-budget- As illustratedby international experience,
bill. It simply instructsthe minister of aryframeworkwouldcontributetodeveloping all of thesecomponentsarecriticalfor the
financeto reportto parliamentany devia- consensus for the fiscal responsibility successof fiscal policyrulesin India.The
tionsfromobligationsundertherulesand legislation.Overall,with the preparation bill recentlysubmittedto parliamentgoes
to proposeremedialaction.Furthermore, of thebillandits submissiontoparliament, a long way towardincorporating manyof
tacitly,noncomplianceis to be penalised theIndianauthoritieshavetakentheinitial these elements.
by loss of reputationin frontof the elec- steps towardmeetingthe threeprecondi- However, the bill leaves considerable
torateandfinancialmarkets.41 It remains tions. Of course, these steps need to be scope, partly throughdelegated legisla-
to beseenwhetherthesearrangements will followed up with furthertechnicalwork tion, to strengthenprovisionson the bal-
suffice to inducecompliance. andanactivepublicdialogueatall levels.43 anced-budgetrequirements andthepublic
Finally, it should be noted thatin most debt limit that are to
open interpietation.
Preparation, Sequencing countriesan importantconditionfor suc- Notably,therearea numberof optionsfor
and Structural Reform cessful implementationof fiscal rules is formulating amechanismthatwouldensure
the phase-in of structuralreforms that the applicationof these rulesin a simple,
Fromthe veryoutset,successfulimple- ensuresustainabilityof the rules- in the growth-orientedf, yet flexible manner-.
mentationof fiscal policy rules is predi- face of fragilityin the financialsystem, ideally,throughanescapeclausetrig'gered
cated on three preconditions.The first rigiditiesin thepublicsectoremployment, automaticallyby well-definedexogenous
prerequisiteis a concertedoutreachcam- demographicpressures,orregionalimbal- shocks. Also, the interplaybetween the
paign, including education and media ances. In India,among the reformtasks currentbalance and the overall balance
coverage- which may take a couple of thatthe authoritieswill confrontover the requirementsneeds to be clarified or
years- to generatesufficientpublic un- mediumrun,perhapsthemostchallenging corrected,to avoidanundesirablesqueeze
derstanding of theneedforrulesandeven- one involves re-examinationof fiscal re- on governmentinvestmentexpenditure.
tually supportfor their implementation lationsbetweenthecentralandstategovern- An importantstep in this regardwould
(Argentina,Brazil, New Zealand, EU). ments, with a view to restoringvertical consist of shiftingto accrualaccounting,
Second,thiscampaignmustbe accompa- balanceandpavingthewaytofiscalrespon- whichimpliesredefinitionof thebalanced-
niedby a politicaldebatethatwill lead to sibility and introductionof rules at the budgetrulesin termsof operatingbalance.
a broadlegislativeconsensusfortheintro- subnationallevel. In other words, it is Moreimportant,thebill is silenton anarea
ductionof fiscal policy rules. Such con- necessaryto adopta mechanismof inter- thathas yet to be addressed,namely,the
sensushas been fundamentalparticularly governmentalrelationswithstrongincen- modalities of fiscal responsibility at
wherefiscalrulesneedpassageof a consti- tives for expenditurecontrolandrevenue subnationallevels of government.In fact,
tutionalamendment(Germany,Switzer- raisingatthesubnationallevel- therecent a majorchallengein Indiawill be to extend
land, and the US), but also if organic agreementon indirecttaxationat the state fiscal policy rules to subnationallevels,
legislationis required(Brazil).Third,it is level is a keyelementinthisregard.Failure while preservinga sufficient degree of
necessaryto mapout a convergencepath. to develop such a mechanismcarriesthe regionalor local autonomy.
This,inessence,callsforaninitialmedium- risk that subnationalgovernmentswill There are some institutionalissues -
termadjustmentprogramme(Argentina, continueto incursizabledeficitsandrely especiallythosewithsignificantandcom-
New Zealand,Peru,EU) that includesa oncostlybailouts.Otherstructural reforms plex politicaleconomyimplications- on
preannouncedpath for key performance - the need for which has been identified which it is difficultto formulatespecific
indicators(overallbalance,currentbalance, by numerousIndianauthorsand govern- recommendations. Lessonsfor Indiafrom
etc) in the run-upto the effective date of ment commissions - that should help the experience of other countries, for
implementation.42The corresponding adherenceto fiscal rules include down- example,on the statutoryinstrument,the
annual budgets are then bound by the sizingthegovernment's workforce,further authorityof arbitration, oron thesanctions
preannounced values.Sucha convergence rationalisation of subsidies,andelimination for noncompliance,are mixed. On trans-
pathmustprovide,insofaras possible,for or streamliningof quasi-fiscaloperations. parency, however, the lessons are un-
the explicit treatmentof deviationsfrom equivocal:clarityin institutionalarrange-
these values in the event of exogenous Summaryand Conclusion ments(intergovernmental fiscal relations,
shocks duringthat period. relationsbetweenthe governmentandthe
These preconditions,to be met in the India'spublicdeficitbiasandindebted- so-called public accounts, relationsbe-
first place with respectto fiscal rules at ness cannot be sustainedmuch longer, tweenthegovernmentandpublicutilities),
the centrallevel, shouldbe accompanied especiallywithstepped-up externalliberali- in fiscal reporting(includingtimely, ac-
or followedby a similareffortat the state sation. Thus, there is a strong case for curateandcomprehensivefinancialstate-
level. In any event, enactmentof fiscal adoptingfiscal responsibilitylegislation ments) and in accounting(in particular
responsibilitylegislationwould be facili- that involves: a high degree of transpar- throughaccruals-basedtreatment).
tatedby progressin a numberof areasthat ency; well-designedfiscal policy rulesat To ensurethe successof the rules,their
areequallyrelevantforeffectivediscretion- the national and subnationallevels of implementationneeds to be precededby
ary fiscal management.Indeed, greater government; short-run contingency a concerted outreach campaign, broad
transparency in institutional
arrangements measuresand a multiyearmacro-budget- legislative consensus, and an adequate
and in accountingand reportingrequire- aryprocess;aninstitutional frameworkfor convergencepath,all of whicharebegin-
mentsshouldbe expedited,even without implementationof rules;and appropriate ningto be tackledin thecontextof thebill.

754 Economicand Political Weekly March3, 2001

This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM

All use subject to JSTOR Terms and Conditions
In addition,ideally, the introductionof
fiscal rules must be accompaniedby an
overarching structural
reformeffortcover-
ing intergovernmental fiscal relations,
publicsectoremployment,subsidies,and
the financialsystem.li
Appendix:SimpleArithmeticof Fiscal
Rules
A macro-fiscalrulecanbe predicatedon
thepolicyobjectiveconsistingof a gradual
reductionin the public sectordebt to (or
maintenance at) a prudentlevel or ratioto
GDP.At thesametime,thisobjectivemay
besufficientlyflexibleto accommodatean
active countercyclicalfiscal stance or at
least to cushion the effect of automatic
stabilisers.
Theintertemporal determination of public
debt is given by
d = [(1 + i)/(l + g)] dt_1-bt
where(as a proportionof GDP)
d = stock of public sector debt
i = averagenominalinterestrateonpublic
debt
= equivalence between current revenue and
g nominalGDP growthrate
b = primarybudgetsurplus.
In a highlyindebtedcountry,the authori-
ties will target
dt+n*< d
whichis to be met withinn years,with a
minimumannualreductionof x in thedebt
ratio, by means of an operationalrule
expressedin termsof the structuralpri-
marysurplus
b* =(i - g) dt.l +x .(1)
Further,the operationaltargetis defined
in referenceto trendgrowthrate
bt* = rt (1 - aGAPt) - ct (1 - PGAPt) - kt
where
r = governmentrevenue
c = primarycurrentexpenditure
k = capitalexpenditure
a < 0 = revenueelasticitywithrespectto
GAP
3 > 0 = expenditureelasticity with re-
spect to GAP
GAP = differencebetween trend GDP
and observedGDP.
< bt*is allowedwhenGAPt> 0
Therefore,bt
and bt> bt*isrequiredwhenGAPt< O.
In otherwords,compliancewith rule (1)
maybe accompaniedby variationsin the
debtratiothatreflectdeviationsfromtrend
growthrate:thedebtratiofalls (increases)
with positive (negative) deviations and
remainsunchangedwhen the economyis
on the trendgrowthpath.
Economic and Political Weekly March 3, 2001
This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM
Rule (1) implies that if the targeted reduc-
tion in the debt ratio is set equal to the
growth rate, x = g, then the target primary
surplus becomes
bt* = idt_1 ...(2)
which implies overall balance. In the event,
the balanced-budget rule (2) leads to a fall
in the debt ratio equivalent to the growth
rate.
As an alternative, of particularrelevance
for a developing country - in need of
infrastructure expenditure with a high
expected social rate of returnand financed
at concessionary terms - the target may be
reset according to the golden rule, requir-
ing current balance,
bt* + kt = idt ...(3)
Rule (3) should be, of course, easier to
meet than either (1) or (2), though it still
results in a fall in the debt ratioto the extent
that kt < gdt.l
However, a preferable approach would
be to redefine the golden rule in terms of
an operating balance requirement (i e,
current expenditure, including deprecia-
tion allowances 6), following accrual-based
accounting,
bt* + kt - 8t = idt_l ...(4)
Notes
[This paper is based largely on seminar
presentationsby the authorat the Reserve Bank
of India, in Mumbai,and at the NationalInstitute
of Public FinanceandPolicy, in Delhi, November
15-16, 1999. V Kelkar,A Lahiriand C Towe, as
well as otherseminarparticipants,provideduseful
comments. The paper also benefited from
background discussions with A J
Bagchi, Reddy,
andP Sen. However,theauthoraloneis responsible
for the views expressed.
1 See Sinha (2000).
2 Admittedly,India's gross public debt ratio is
surpassedby the debt ratioof some advanced 16 This would also entail greaterpublic scrutiny
economies (Belgium, Greece, Italy, Ireland,
Japan),which have ready access to financial
markets.
3 Broadlyspeaking,the debtratiois stablegiven
thatthe primarydeficit as a ratioto GDP does
not exceed the differencebetweenthe nominal
growth rate less the averageeffective interest
rate on governmentliabilities, multiplied by
the debt ratio.
4 See the analysis of government debt
sustainability in India, in Rajaraman and
Mukhopadhyay(1999). For illustrativefiscal
adjustmentscenarios,underalternativepolicy
assumptions, see Reynolds (2000).
5 For a discussion of this broad-basedeffect in
the Indiancase, see Bajpai and Sachs (1997).
6 See, for example, the estimates for industrial
countries in Tanzi and Fanizza (1995).
7 These subsidies are estimatedto have reached
around 16 per cent of GDP in the late 1990s;
see Kelkar (1999).
8 See Kopits (2000). In comparisonto crisis-hit
All use subject to JSTOR Terms and Conditions
countries, India's economy has been far less
open, its exchange rate more flexible, and the
proportionof governmentshort-termliabilities
much lower.
9 This approachhas been popularisedby New
Zealand's Fiscal Responsibility Act of 1994,
whichencompassesa varietyof criteriadiscus-
sed herein,includingpermanentrulesrequiring
maintenanceof a prudentlevel of public debt
and budget balance over the economic cycle.
10 See Kopits and Craig(1998), which forms the
basis of the InternationalMonetary Fund's
Codeof GoodPracticesin FiscalTransparency.
11 Muchlike in New Zealand,Australia'sCharter
of Budget Honesty Act 1998 requires the
nationalauthoritiesto publish: fiscal strategy
statements;annualreportson budgetandfiscal
outlook(includingmid-yearreports),andfinal
budgetoutcome;intergenerationalreports;and
pre-election economic and fiscal outlook
reports.
12 Charles Goodhart's observation (made in
connectionwithtargetingmonetaryaggregates)
thata statisticalor accountingmeasureceases
to be a reliable performanceindicatoronce it
is declared an official target, strengthensthe
argumentfor transparencyin the application
of fiscal policy rules.
13 Greater central bank independence, more
orderly intergovernmental fiscal relations,
privatisation,andincreasedcommercialisation
and outsourcing of traditional government
activities, are among the recent steps toward
institutional transparency taken in Latin
America, Europe and former socialist
economies.
14 This is illustrated,for example,by the require-
ments in the EU to follow accrualaccounting;
to classify privatisationreceipts as financing
in the calculation of the budget balance; to
measuredebt on a gross basis; and to expand
coverage to the general government.
15 Accordingly,below-cost pricingof energyand
water services and above-market interest
payments for financing from public accounts
- coupled with preferentialtax treatmentof
deposit holders- would have to be identified
explicitly in thebudgetas subsidies.A compar-
able case of excessively close relationship
between subnational governments and their
state-ownedfinancial institutionshad existed
earlierin Brazil and still prevails in Germany
- under challenge by the European
Commission.
of the Memorandaof Understanding(MOU)
reachedbetween the centraland state govern-
ments,involvingfinancialtransfersto thestates
in exchange for appropriateconditionality.
17 This informationshouldbe supplementedwith
estimates (being prepared at the RBI) on
contingentliabilitiesatall levels of government,
as currentlyenvisaged under the Bill for the
central government.
18 Exceptions are countries (Canada, US,
Switzerland)withoutthe precedentof bailouts
of defaultingsubnationalgovernmentsby the
centralgovernment.In suchcases, creditrating
agencies assess risk separately for each
borrowing governmentjurisdiction.
19 An earlier proposal to impose a limit on the
flow of borrowingor extension of guarantees
againstthecollateralof theConsolidatedFunds
of India (in accordancewith Articles 292 and
293 of the Constitution)would have opened
the door to a significant loophole, namely,of
borrowing against the public accounts. See
755
 Kanagasabapathy, PattnaikandJayanthi(1997).
20 The limitson borrowing(thatis, only to finance
capital expenditures) and on the debt ratio,
containedin the bill, could be usefully comple-
mented with a regulatoryprovision allowing
for the investment of small savings deposits
andprovidentfundsin marketableinstruments
(ratherin the public accounts), thus forcing
the governmentto seek financing in the open
market, within the borrowing/debtlimits.
21 For a discussion of criteria to enhance the
effectiveness of fiscal rules, see Kopits and
Symansky (1998).
22 See the relationshipbetweena primarysurplus
rule and the debt target in the Appendix.
23 Assumingan annualtrendgrowthrateof 2 per
cent, the proposed rule would require the
governmentto generateexcess revenue when
actual GDP growth exceeds 1.8 per cent and
would allow for excess expenditure when it
declines below 0.5 per cent a year. The excess
revenue (expenditure) was specified in
reference increments in excess (shortfall) in
GDP growth. For a conceptual definition of
the target, see the Appendix.
24 On the basis of historically estimated fiscal
parameters,a 1 per cent decline in output is
estimated to result, on average, in a 0.6 per
cent budget deficit in the EU. Therefore,the
3 per cent deficit referencevalue underEMU
is consistent with a 5 per cent below-trend
deviationin GDP. However,a waiverfromthe
reference value can be invoked in the event
of a 2 per cent contractionin GDP- which
providesfor a sufficientmarginfrompotential
growth of about 2 per cent for most EU
members.
25 Underthisapproach,forexample,theauthorities
could endeavourto accelerate(decelerate)the
execution of capital projects in the face of
adverse (favourable)cyclical shocks.
26 Priorto adoptingany one of these options, it
is necessary to generate estimates of trend
GDP growthrateand of key fiscal parameters
(notably,tax revenue elasticities with respect
to GDP) and to conductsimulationson recent
historical data. This would permit an
assessment of the practical feasibility of the
options under consideration.
27 Unless tax elasticities were relatively small,
the 2 per cent deficit limit (in the event of an
'average'recession)impliesthat,undernormal
conditions,the authoritiesactuallywould have
to target a budget surplus.
28 Fromtheperspectiveofintergenerational equity,
the golden rule shouldbe defined in terms of
operating balance, that is, implying that
taxpayersin each time periodpay for the costs
(depreciationand plus interest payments) of
existing capital assets from which they derive
benefits in that period; see Robinson (1998).
29 In Brazil, to reverse the rapid growth of per-
sonnelexpendituresin recentyears,the golden
rule is strengthened by an additional rule
limiting the wage bill (including government
pensionpayments)as a proportionof netcurrent
revenue at each level of government.
30 In simpleterms,a narrowaccountingdefinition
would be limited to the acquisition of fixed
assets,thatis, those with a useful life in excess
of one year. On the other hand, an attempt
could be made to identify current outlays -
consisting mainly of often - neglected opera-
tions and maintenance expenditures - that
would be requiredto supportcapital projects.
31 See Kopits, Jimenez and Manoel (2000) for
a discussion of the internationalexperience
with fiscal policy rules at subnationallevels
756
This content downloaded from 128.193.164.203 on Mon, 5 Jan 2015 18:51:25 PM
All use subject to JSTOR Terms and Conditions
of government under each approach.
32 Forexample,while insomeUS statesthegolden
rule is applied only ex ante, in others it is
appliedon an ex post basis as well; a number
of states do not permit carryoverof unspent
appropriationsfrom year to year; some states
have contingency funds; and the scope for
creative accounting varies among states. In
Canada,thereare differencesin the design of
rules across provinces,includingin the nature
of the penalties for noncompliance; for
example, in one province,the penaltyconsists
of salarycuts for cabinet membersunless the
overrun in the budget deficit is caused by
exogenous shocks.
33 This arrangement,which operatedin different
forms during 1923-92, was increasingly
circumvented through ingenious various
financing techniques (sales, leaseback
operations, etc), was finally replaced with
transparent reporting requirements on the
states'fiscalpolicy intentionsandperformance
- in line with the requirementsof the Charter
of Budget Honesty Act of 1998.
34 In Colombia,in additionto an 80 percent debt-
revenue limit, each territorialgovernment's
interestpaymentsmay not exceed 40 per cent
of its operating surplus.
35 See the discussion of the relevance of the
implicitbailoutclause with regardto the EMU
fiscal reference values, in Eichengreen and
von Hagen (1995) and McKinnon (1996).
36 Theneedforcoordinationin fiscal management
between the central and state governments,
even without such legislation, has been
recognised by Reddy (2000).
37 The Fiscal Solvency Act of 1999 extends an
"invitationto the provincial governments to
enacting norms that are consistent with the
present law." Under moral suasion from the
federal authorities, in December 1999,
provincial governors signed an agreement
(CompromisoFederal)committingthemselves
"to introduce legislative measures toward
reducingthe budgetdeficit, containingpublic
expendituresandensuringfiscal transparency"
in each province.
38 For an overview of multiyear budgets and
fiscal targets in OECD countries, see OECD
(1995). In the US, forexample,boththe Office
of Managementand Budget, on behalf of the
executive branch, and the Congressional
BudgetOffice, anarmof the legislativebranch,
preparecompetingbaseline("currentservices")
budget projections-and projections incorpo-
ratingalternativepolicy measures.The adver-
sary relationshipbetween the agencies pro-
vides a useful context for the policy debate;
in general, differences between the two sets
of projections reflect mainly differences in
economic and technical assumptions.
39 The coverage of the Five-YearPlan is limited
largely to capital expenditure, and once in
place, it is seldom revised to takeinto account
deviations in implementationor to accom-
modate unanticipated developments in the
course of the plan period.
40 The automaticspending cuts provided in the
US under the Budget Enforcement Act of
.1990 -though not a permanentfiscal policy
rule - to meetagreed-uponbudgetconstraints,
are an example of a contingency measure.
41 The bill specifically protectsfromprosecution
governmentofficials actingin good faithwhen
discharging their responsibilities under the
rules.
42 IntheEU, compliancewiththedeficitreference
value was to be achieved over a five-year
Economic and Political Weekly
period (ending in 1997) albeit without
specifying the profile of the convergence. In
Argentinaand Peru, declining annualbudget
deficit limits have been specified in the fiscal
responsibilitylaws, over a three-andtwo-year
period, respectively, prior to full compliance
with the rule. By contrast, in the Brazilian
legislation, the rule enters into effect
immediately following enactment.
43 An additionalquestion to be addressedis the
adequacy of the convergence path envisaged
by thebill, whichshouldbe largelydetermined,
inter alia, by the pace of domestic financial
liberalisationand of opening up of the capital
account.
References
Bajpai,N andJD Sachs(1997): 'India'sEconomic
Reforms: Some Lessons form East Asia',
Journal of InternationalTradeand Economic
Development, Vol 6, No 2, pp 135-64.
Eichengreen,B and J von Hagen (1995): 'Fiscal
Policy andMonetaryUnion:Federalism,Fiscal
Restrictionsand the No-Bailout Rule', CEPR
Discussion Paper No 1247, Centre for
Economic Policy Research, London.
Kanagasabapathy,S R, R K Pattnaik and K A
Jayanthi (1997): 'Placing a Statutory Debt
Limit on Public Debt', Reserve Bank of India
Bulletin, December, pp 983-1009.
Kelkar, V (1999): 'India's Emerging Economic
Challenges', Economic and Political Weekly,
August 14, pp 2326-29.
Kopits, G (2000): 'How Can Fiscal Policy Help
Avert CurrencyCrises?', Financial Crisis: A
Never-Ending Story, Oesterreichische
Nationalbank, Vienna, pp 35-45.
Kopits, G and J Craig (1998a): Transparencyin
Government Operations, IMF Occasional
Paper No 158, InternationalMonetaryFund,
Washington.
Kopits,G and S Symansky(1998b): Fiscal Policy
Rules, IMF Occasional Paper No 162,
InternationalMonetary Fund, Washington.
Kopits, G, J P Jimenez and A Manoel (2000):
'ResponsabilidadFiscal a Nivel Subnacional:
Argentinay Brasil', XII Seminario Regional
de Pol!ticaFiscal: Compendiode Documentos,
UNECLAC,Santiago,January24-26, pp 25-57.
McKinnon, R I (1996): 'Monetary Regimes,
Government Borrowing Constraints, and
Market-PreservingFederalism: Implications
for EMU', paperpresentedat the Conference
on the Nation State in a Global Information
Era: Policy Changes, Queen's University,
Kingston, November 13-15 (unpublished).
OECD(1995): BudgetingforResults:Perspectives
on Public ExpenditureManagement,OECD,
Paris.
Rajaraman, I and A Mukhopadhyay (1999):
'Sustainability of Public Domestic Debt in
India', December 3, unpublished.
Reddy, Y V (2000): 'Legislation on Fiscal Res-
ponsibility and Reserve Bank's Role: Some
Issues', ReserveBankof IndiaBulletin,March,
pp 259-65.
Reynolds,P (2000): 'FiscalAdjustmentandGrowth
Prospects in India' (unpublished).
Robinson,M (1998): 'MeasuringCompliancewith
the Golden Rule', Fiscal Studies, Vol 19,
No 4, pp 447-62.
Sinha,Y (2000):Bill No 220 of 2000: Statementof
ObjectsandReasons,New Delhi,December11.
Tanzi,V andD Fanizza(1995): 'FiscalDeficit and
Public Debt in IndustrialCountries,1970-94',
IMF Working Paper 95/49, International
Monetary Fund, Washington.
March 3, 2001