Limits to borrowing and guarantees

THE problems faced over the last 50 years, what statutory solutions are possible and to what extent such solutions need to be found through amendments to the Constitution are discussed here. Following are the brief outline of the issues and aspects: (1) Fiscal responsibility of the Centre and the States; (2) Limits to borrowing by the Centre and the States; (3) Issues relating to vertical transfers from the Centre to the States; (4) Issues relating to local bodies and (5) Role of the Comptroller and Auditor General.

It may be noted in this connection that, according to a press report, the National Constitution Review Commission has, in its first meeting, discussed areas of immediate contemporary concern, which included: (i) fiscal and monetary policies, size of Government and of government expenditure and the efficacy of the public audit mechanism; and (ii) decentralisation and devolution of powers and strengthening of Panchayati Raj institutions.

At the time the Constitution was framed, doubts relating to fiscal management were not evidently the uppermost in the minds of the framers. Perhaps they never dreamt of the profligacy that has now become chronic in the fiscal system. Procedurally, an annual financial statement (that is, budget) is required which will distinguish expenditure on revenue account from other expenditure. A distinction is also to be made between the Consolidated Fund and Public Account. No money will be appropriated from the Consolidated Fund except in accordance with the law and for the purposes and in the manner provided in the Constitution. In other words, expenditure can be incurred to meet any purpose of the Constitution. Even this broad mandate is diluted by Article 282. As already stated, that Article says that the Central or the State governments may make any grants for any public purpose whether or not within the purview of the Parliament or a State Legislature.

Currently, when the fiscal situation is grave and, in the case of some States, virtually on the point of breakdown, it is imperative to examine how fiscal responsibility can be statutorily imposed and accountability emphasised. The Finance Minister has announced that a Fiscal Responsibility Act is being contemplated. Even so, some reference needs to be pointedly made in the Constitution itself to the desideratum of fiscal responsibility and of prudent and efficient expenditure management. An elaboration of the `canons of financial propriety' would be welcome and that would require discussion and consensus.

Would any reference to balancing the budget or keeping the fiscal deficit within a certain proportion of gross domestic product be useful? Or should the emphasis be on the revenue budget? These questions lend themselves to debate. Fixing any percentage requires a careful analysis and assessment of data and their extrapolation.

Perhaps a realistic way of proceeding, so far as the Constitution is concerned, could be to add a proviso to Art. 112 to the following effect. Along with the annual financial statement, the executive shall present to the Parliament an estimate of revenue and expenditure for three years and a statement on the steps expected to be taken to restore budgetary balance. This will help the executive to think of the medium term and not merely of the particular year, and impose on it a measure of accountability for what it says and what it does.

The emphasis on the fiscal responsibility has to be made also in relation to the States, most of which are hardly blameless in the matter of fiscal prudence. A question that needs to be considered is whether the leveraging capacity of the Centre over the States could be enhanced. One cannot put forward the alibi of coalition governments and admit to a callous disregard of long-term national interest.

An opinion that is gathering strength is that constitutional limits to borrowing and to guarantees should be imposed. This is a salutary development. Should such limits be a percentage of the gross domestic product or some other norm? While expression of a percentage is better than the stipulation of an absolute figure, the percentage game should be played with due caution. More analysis and debate are necessary and it is doubtful whether the Constitution Review Commission would be able to come to a finding within the period of its short tenure.

Art. 292 refers to borrowing `within such limits, if any, as may from time to time be fixed by the Parliament by law' and to the giving of guarantees `within such limits, if any, as may be so fixed'. Art. 293 (1) makes a similar reference with regard to States. There is an option given to the Parliament and the State legislatures by the use of the words `may' and `if any'. It would be simple and sufficient to substitute `may' by `shall' and delete `if any'. This would make it obligatory for the Parliament and State legislatures to pass a law and take a stand on the subject, after due deliberation.

The Centre-States fiscal transfers have come for frequent attention particularly through the reports of the Finance Commissions. Several suggestions for improvement, particularly in favour of the States, have been made in the past. All of them do not require a Constitutional amendment. But one could refer to at least two points which may have a bearing on the Constitution. One is the possibility of the States levying a surcharge on income tax, as is the practice in certain other federations. This would basically help the richer States and also do away with the advantages of a uniform and relatively stable regime of direct taxation. But the suggestion is there and a Constitutional amendment would be necessary, if such a step is to be taken.

The other point is whether the devolution to the States could be fixed at a certain percentage of the Central tax revenues. The actual percentage of devolution has been increasing over the years. The current magic number is 29 per cent, recommended by the Tenth Finance Commission (the report of the Eleventh Finance Commission is awaited). In reply to a question, the Union Minister of State for Finance has stated in the Rajya Sabha on April 18 that the formula suggested by the Tenth Finance Commission is under consideration of the Government and that the Government would also take into account the recommendation of the Standing Committee on Finance to amend the Constitution to implement the alternative devolution formula.

Several issues need to be considered in relation to this proposal. First, the period for which the percentage will be valid. The Tenth Finance Commission suggested 15 years and a review thereafter. Another suggestion is that the percentage may be reviewed by each Finance Commission, that is, once in five years. Second, to give scope for a gradual increase in devolution, would it be appropriate to simply stipulate a devolution of `not less than 29 per cent'? Would it at the same time be useful to link increased devolutions to increased outlays by States in the social sector, taking into account the tasks of the Government outlined in the Directive Principles of State Policy? This is obviously desirable in view of the falling outlays by the States in the social sector.

A basic question is whether, if the overall devolution percentage is fixed, the Articles relating to sharing income tax and excise duties and the relevant term of reference of the Finance Commission could be recast. The Finance Commission could simply take the 29 per cent as the basis and work out a horizontal sharing formula.

The central issue in vertical transfers whether between the Centre and the States or between the States and the local bodies is the balance between functions and financial resources. It is a point for consideration whether the Constitution could refer to a norm based approach to horizontal sharing on the basis of all- India norms. This may also have the result of better equalisation between States.

There has also been a suggestion that Finance Commissions should not be just quinquennial affairs and that a standing mechanism to monitor vertical transfers would be useful. Perhaps the inter- State Council (Art. 263) could be entrusted with this responsibility.

The Constitutional amendments relating to local bodies are relatively recent and the experience with State Finance Commissions is limited. It would appear that devolutions to local bodies have not taken place to the extent announced by State governments. (Even the announcements have been tardy in several States). Also, a mere provision calling on the Union Finance Commission to suggest measures to augment the Consolidated Funds of the States to make more resources available to local bodies seems to be wishful thinking considering the precarious financial position of the States themselves.

The position of the Comptroller and Auditor General needs to be strengthened. It may be necessary to give him a greater role that would contribute to better fiscal management at the level of the Centre, the States and the local bodies.

It is necessary that public opinion is generated and non- governmental bodies such as the Public Expenditure Round Table (PERT) are involved in developing the directions for change. Fiscal management through legislative fiat or constitutional amendment is not the complete answer. A change in the mindset and a strong public opinion is necessary; but legislation and in a selective way, Constitutional amendments, would evoke a better sense of fiscal responsibility and make pronouncedly noticeable any failure in this respect.

K.V.

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