Fiscal responsibility - more than arithmetic

By S. Swaminathan

There are no two opinions on the crucial need to extricate the budgets of the Centre and the States from the twin evils of reckless spending and thoughtless borrowing. Yet the view that a budgetary strategy can be enshrined in a Fiscal Responsibility and Budget Management Bill, as is now proposed, is neither too self-evident nor is it consistent with the need to craft a fiscal policy that will be more positive than merely be corrective, in terms of unsustainable deficits, both on the revenue account and in the overall framework.

Rationale of the Bill

The central issue of fiscal responsibility, as the Bill propounds it, is that the inherited dependence on borrowings to bridge the revenue deficit ought to be eliminated.

There are two corollaries to this proposition. The first is that current expenditure over the next five years should be fully met by revenue receipts made up of tax and non-tax revenue. The second is that borrowing by the Government should be solely justified in terms of productive capital expenditure undertaken by the Government. Implicit in the first proposition is that tax and non-tax revenues need to be augmented in a progressive manner. That there are different models of bringing this about needs to be underscored. A judicious combination of an escalation of tax rates and an enlargement of the tax net or coverage is what would obviously be needed. Although the Bill does not deal with the practical modalities, there can be little doubt that an integration of a multiplicity of commodity taxes through a value added tax mechanism would best conduce to the optimisation of tax revenue aligned to a regime of high growth in the economy.

The second imperative of phasing out borrowing except for capital expenditure similarly admits of a plurality of strategies. A pragmatic zero-base-budgeting (ZBB) could help the Government weed out many projects that have been lingering for years and which have perhaps reached obsolescence even as they remain incomplete. Terminating such projects through sale on a ``as is where is'' basis would certainly call for a special institutional mechanism but without the efforts needed for such an operation, the phenomenon of scarce capital resources being spread thin over a multiplicity of projects including the relatively short- gestation, employment-intensive projects relating to the infrastructure, will continue to haunt the budget-makers.

From addiction to borrowing to abstinence is not going to be an easy transition even granting that a five-year timeframe appears to be a viable proposition. The danger inherent in the proposition is that the Government could slip into a lethargic mindset and opt against new investment projects. After all, the most effective method of cutting down on borrowing would be for the Government to eschew capital expenditure to the extent possible. That this will have ruinous implications both for economic growth and for development of infrastructure and of the social sectors that vouchsafe the empowerment of the poor cannot be exaggerated.

Debt the hardest nut to crack

``Fiscal Responsibility'' is a mindset which has mostly been violated for about two decades, both at the Centre and in the States. While this mindset is not necessarily bounded by absolutist norms (such as austerity defined by a mere paring down of expenditure through an across-the-board slashing of budgetary allocations), there is no greater manifestation of failure of fiscal responsibility than the accumulation of public debt and the resultant pre-emption of revenue by debt-servicing. In the Union Budget for the current year, total debt servicing is expected to be Rs. 225,683 crores, comprising interest payments of Rs. 101,266 crores and repayment of debt of the order of Rs. 124,417 crores.

Interest payments during the year represent 49.7 per cent of the revenue receipts of the Centre and 36 per cent of the total revenue expenditure. Repayment of debt this year works out to 92.2 per cent of the capital receipts of the Centre. A more precise measure of the magnitude of debt repayment is to express it in terms of the amount of market borrowing plus recoveries of loans. Looking at it this way, repayment of debt this year (Rs. 124,417 crores) actually exceeds the total market borrowing plus recoveries of loans (Rs. 89,922 crores). No comment would be really needed to show that this is an utterly improvident situation. Nor is the official discovery that the continued resort to borrowing by Government for financing current expenditure would seriously undermine ``inter-generational equity'' anything more than a rhetorical platitude.

Where action is most needed

Government budgets are ominously entrapped in the unending coils of debt. It is one thing to hope that in the next five years, revenue deficits will wither away and that in the process, the rate of expansion of debt will decline.

What the policymakers need to strategise is how to reduce the public debt itself starting with the budget for 2001-02 and thereby the interest encumbrance in the revenue budget. In simple terms of conventional public finance, what the country needs is a massive retirement of public debt.

Where can the resources come from except through the sale of assets locked up in a large number of public sector enterprises? So long as the politics of discord and one-upmanship continue to block the dictates of privatisation, the huge pile of public debt will not diminish and all talk about fiscal responsibility will remain in the realm of glorified arithmetic.

If Mr. Yashwant Sinha hopes that Parliament will celebrate the Fiscal Responsibility Bill, he could be mistaken for political parties, not only in the Opposition but within the NDA coalition, might see ample reasons to interpret the Bill as a foreclosure of multiple budgetary options in the future besides the objection to a new statute stifling the legitimate right of governments in the future to practise tight-rope walking in their own preferred fashion!

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Section  : Business
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