A Bill to debate

NO GOVERNMENT CAN afford to indulge in fiscal profligacy and both the Centre and the States were guilty on this count in the 1980s as well as 1990s. But is an end to profligacy best brought about by legislation that ties the hands of the Executive and Parliament to pre-determined fiscal targets over five to 10 years? The Fiscal Responsibility and Budget Management Bill 2000 assumes so, premised as it is on the achievement of rectitude by fiat. But there is much that can be questioned in the Bill and Parliament needs to move with caution so as not to create new and bigger problems even as it attempts to ``solve'' old ones.

There is a burden of debt on the economy and interest payments are pre-empting a substantial proportion of government resources. The inability of the Centre to cope with competing expenditure and revenue demands has meant that even after a decade of attempted fiscal consolidation, the situation has not changed much for the better. The Bill commits the Centre to a phased elimination of the revenue deficit and a lowering of the fiscal deficit to 2 per cent of GDP by 2005-06. If the Government fails to meet quarterly and annual targets on revenue and expenditure, there will be automatic cuts in outlays. A transition to fiscal rectitude is therefore built into the system. But there are many potential pitfalls. First, bound as the Government is to annual targets, it will be giving up some of its freedom to prioritise expenditure. True, the Government with all the freedom in its possession in the existing system has been able neither to prioritise expenditure nor contain deficits. But the danger with a fiscal responsibility Act is that the wrong cuts in expenditure will almost surely take place. This is the second problem with pre-determined targets. As the experience during the IMF programme of the early 1990s and even thereafter has shown, any attempt at forced fiscal consolidation leads to a slashing of social sector spending and capital outlays because the lobbies with an interest in other forms of expenditure and those against revenue mobilisation are much stronger. The third problem with the Bill is that it has one too many numerical and time-bound targets. In addition to those on revenue and fiscal deficits, there will be a cap on government guarantees and Central Government liabilities will have to be brought down to 50 per cent of GDP by 2010-11. Even the famed New Zealand legislation (whose sheen, incidentally, has considerably worn off in recent years) did not specify a numerical target on debt since it rightly assumed that a government would have to take a decision based on contemporary conditions. Besides, that law also dealt only with operational surpluses and a ``prudent'' level of debt. The fourth but not the least problem with our Bill is that the target for liabilities is based on the current exchange rate of foreign debt. With the rupee steadily depreciating year after year, any pre-determined and legally-bound target for debt reduction on such a basis is a potential recipe for disaster. In addition, there are operational limitations to the Bill. Three of them can be mentioned. One, it deals, as provided by Article 292 of the Constitution, only with transactions in the Consolidated Fund of India. The Public Account of India, which covers small savings and other funds, is not covered. Two, it will apply only to the Centre. And, three, it is questionable if ex ante annual fiscal targets as a proportion of GDP can have any legal meaning when GDP estimates are finalised only a year or more after the event.

All this is not to deny that there is much that is positive in the Bill. There is an emphasis on transparency (in the budget- making process), stability (in the outlining of annual priorities in taxation, borrowings and more) and accountability (in compelling the Centre to explain any failure to meet targets). But the larger approach and the operational details are deeply flawed and call for a very careful debate lest a millstone is tied round the Centre's neck.

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