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By Pradeep S Mehta and Amol
Kulkarni
The political class’ cavalier
approach will cost us dear
The Finance Minister has
repeatedly asserted that India’s current account deficit and
fiscal deficit will be limited to $70 billion and 4.8 per
cent of the GDP, respectively, during the current fiscal.
While the former seems plausible on the back of recent
policy revisions, decline in imports and growth in exports,
the latter seems difficult, especially seen in light of the
government’s past performance.
Current account deficit is the
excess of imports over exports of a country. Fiscal deficit
is the excess of total expenditure (capital and revenue) by
the government, excluding repayment of debt, over total
receipts, excluding debt receipts (capital and revenue).
Revenue deficit is the difference between revenue
expenditure and revenue receipts.
With a view to managing the
fiscal and revenue deficit targets, the Fiscal
Responsibility and Budget Management Act (FRBMA) was enacted
in 2003. Corresponding rules were also drawn up.
The FRBMA, in its original form,
envisaged eliminating revenue deficit and reducing fiscal
deficit to 3 per cent of GDP by 2008. It gave an impression
that the government was serious about adopting prudent
fiscal management practices and ensuring fiscal discipline.
While eyebrows were raised in
2004 when the deadline was pushed to 2009 without any hiccup
in Parliament, the government’s intentions could still be
trusted
Eventually, in 2009, all hopes
were shattered when the revenue and fiscal deficits were
recorded as high as 4.67 and 6.21 per cent, respectively, of
GDP. The government took shelter behind the expenditure on
account of fiscal stimulus, necessitated by the global
financial meltdown, for missing the fiscal targets.
However, a closer look at
government spending suggested a different story.
DIFFERENT STORY
The year-on-year increase in
food and fertiliser subsidies during 2008-09 was 40 and 136
per cent, respectively. Many experts, including the 13th
Finance Commission, demolished the government’s case and
established that the fiscal stimulus was not solely
responsible for non-compliance with deficit targets, and pay
revision, farm debt waiver, and food and fertiliser
subsidies added substantially to the fiscal burden.
It must be noted that 2009 was
also an election year. Such populist measures do not serve
the country well in the long term.
The FRBMA provided that no
deviation from the targets could happen without approval of
Parliament. The targets could be exceeded only in case of
national security, national calamity and other such
exceptional grounds as specified. Further, in case of a
deviation, the finance minister was required to suggest and
implement remedial measures to increase revenue and reduce
expenditure.
From 2009 to 2012, the
government was in continual non-compliance with FRBM
targets. Never did it manage to eliminate revenue deficit or
reduce fiscal deficit to 3 per cent of GDP.
The justifications provided in
the name of fiscal stimulus and financial meltdown continued
for around four years and not even once was there an attempt
to block approval of deviations in Parliament.
However, what transpired
post-2012 is even more surprising and deeply disturbing.
DILUTION OF TARGETS
Following the Budget speech for
2012-13, certain amendments to the FRBMA were introduced
that postponed attaining the fiscal deficit of 3 per cent of
GDP by 2017, and targeted achieving revenue deficit of 2 per
cent GDP by 2015.
Consequent amendments were made
to the rules in May 2013. This meant substantial dilution
and deference of the deficit targets. The 13th Finance
Commission had laid down a fiscal road map and suggested
certain amendments to the FRBMA such as reforms in mid-term
statements, elimination of revenue deficit by 2015 and
explanation of shocks requiring relaxation of targets. None
of these were accepted.
The amendments to FRBMA were
passed again without a glitch. Any deliberations on the
proposed amendments could have highlighted that they
ratified fiscal malpractices of the government, and need
substantial overhaul.
India is not alone in being
nonchalant about deficit targets, but surely it could have
devised a more intelligent plan to adhere to fiscal
discipline. Countries such as Germany, Switzerland, Slovenia
and Spain, among others, have learned from their mistakes
and adopted a ‘balanced budget’ principle, which requires
structural balances on a yearly basis and absolute balances
over thecourse of a business cycle.
So, an expansionary fiscal
policy during recession is required to be balanced with
savings during good times. The EU policies prescribe
stringent review and monitoring for fiscal practices of
member states and even provisions for penalties in case of
non-compliance.
There is no dearth of best
practices for fiscal management. The Indian legislature just
needed to look around and localise such policies. However,
in the haste to sanction its imprudent practices and cover
up its misconduct, the government has decided to inflict
long-term pain on the economy.
VIGILANT OPPOSITION
The absence of a vigilant
opposition to formulate a workable solution that avoids
long-term pain is a problem as well. Even civil society is
at fault for not questioning the government. High fiscal
deficits heighten inflation, increase the risk of external
sector imbalances and dampen private investment, growth and
employment.
As 2013 and 2014 are election
years, it would be nearly impossible for the government to
comply with the deficit targets. A preview is already
available in the form of its first five months’ performance,
during which time fiscal and revenue deficits have reached
74.6 per cent and 87.4 per cent of the year’s target,
respectively. Thus, it would be a challenge for the Finance
Minister to keep his promise.
Mehta is Secretary-General
and Kulkarni a policy analyst, CUTS International
This news can
also be viewed at: http://www.thehindubusinessline.com/
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