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Need for credible fiscal plan

The Central Government's budgetary fiscal deficit has surged nearly twice to Rs.2.70-lakh crore during the first five months of the current financial year (April-August 2011-12) from Rs.1.50lakh crore in the corresponding period last year. The Finance Minister is reported to have told the reporters that this accelerated pace of borrowing to finance the deficit will not bloat the overall budget target which would remain at 4.6 per cent of gross domestic product (GDP) for the whole financial year ending March 31, 2012. How this will be achieved is not known. Lack of meaningful data and an action-oriented medium-term fiscal reform raises the question of ineffectiveness of deficit management and fiscal consolidation.
Government borrowing

In the earlier times, government borrowings were treated as part of receipts. In the budget for 1984-85, total receipts were estimated at Rs.40,501 crore, including market loans of Rs.4,100 crore, and total expenditure at Rs.42,536 crore with an uncovered deficit of Rs.2,035 crore (Rs.1,762 crore after taking into account the effect of new taxation proposals). This was changed later on (presumably as part of our negotiations for an IMF loan) and a more conventional definition of budget deficits as the excess of total expenditure over total revenue (excluding receipts from borrowing) to be covered by borrowing has been followed. But numerous problems still remain in arriving at the correct figure of fiscal deficit and drawing up a credible fiscal plan. This has assumed special importance now when we are grappling with inflation, slower economic growth and volatility in the world economy.
Role of RBI

Excessive government borrowings put the Reserve Bank of India in a difficult position with no option but to raise interest rates frequently to control money supply and inflation without slowing growth. In the U.S., the Chairman of the Federal Reserve (their central bank) has stressed the role of fiscal policy in economic recovery. The issues to be covered by a credible medium-term fiscal plan are dealt with here. All the expenditure should be included in the projection. Merely giving aggregate figures with no break-up into major expenditure provisions lacks clarity.

Subsidy to oil firms

There should be no understatement. One example is grossly inadequate provision for subsidy to oil marketing companies to cover their losses due to administered prices. While making provision for this, government can also indicate the losses claimed by oil companies based on their accounts. Also, ONGC is bearing a part of the losses which should be borne by the government and shown as expenditure of government. The loss to BSNL due to telephone connections in rural areas should be legitimately borne by the government. Other examples of possible understating the funds requirement are expenditure on Food Security programme and Employment Guarantee Scheme. According to latest clarification from the Planning Commission, there will be no poverty line cap for social schemes, food entitlement. The application of the Minimum Wages Act will impact cost of Employment Scheme. Government accounting is on cash basis and omits expenditure accrued but not paid. The liabilities on this account at the end of the year should also be shown as a footnote to assess the credibility of the annual deficit. The projections of expenditure should reflect the anticipated results of specific reform measures to achieve the required priorities which should be spelt out. Some examples of areas are: reduction of subsidies and avoiding doles but encouraging creation of job skills and employment, adequate provision for infrastructure, enough for maintaining existing assets, removing overlapping schemes and those which have outlived their usefulness and reducing the time and cost overruns in project implementation. Dependence of public sector undertakings (PSUs) on government budget has to be reduced / eliminated. Latest examples are: cash losses in Air India with bale out by government and deteriorating losses of the Railways.
Fiscal stimulus

If any fiscal stimulus is envisaged the details of tax concessions and specific expenditure schemes in the stimulus package have to be highlighted along with expected outcomes. The actual outcomes of the last fiscal stimulus package done, including the loan waiver of Rs.70,000 crore, should be indicated. The revenue in the first six months of this financial year is reported to be behind budget estimates due to slower economic growth. The problems of future projection will be more tricky as global volatility is not likely to end soon. It is necessary to spell out assumptions for revenue projections in the medium-term fiscal plan. Examples of other areas needing attention are: collection of arrears in revenue, review of

revenue forgone due to tax concessions, introduction of GST, and disinvestment of shares in PSUs.

Disinvestment has been a non starter in the current financial year due to market volatility (budget estimate of Rs.40,000 crore from this source). The medium-term plan should reflect expected results of a time-bound reform programme in these areas. The formulation of medium-term fiscal plan on the lines suggested above will impart credibility to fiscal consolidation efforts and contribute to consumer and investor confidence. This will be of help to the Reserve Bank of India in controlling the money supply.

Government should also consider widening the definition of fiscal deficit to include quasi fiscal deficits like borrowings by the Railways, PSUs and autonomous bodies fully funded by the government. Repayment of past debt (Rs.100,927 crore) is not shown as capital expenditure in this year's budget and to that extent the fiscal deficit seems to be understated. This merits examination. Obsession with treating deficit as a statistical target of a percentage of GDP without undertaking basic fiscal reforms in raising revenue and spending public money affects the credibility of government's fiscal planning. Change in base years and delays in getting final GDP numbers and the recent statistical controversies on measuring poverty levels and measuring wholesale price index underscore this. With no lack of innumerable studies and taskforce reports what is needed is action to implement broad-based fiscal reform.