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Towards an Index of Fiscal Responsibility
Mandating fiscal responsibility for the Government through the statute is an idea which is yet to receive active political endorsement in India. But the fiscal environment for the Central and State governments has already become perilously grave. The subject cannot brook any further delay. It is time concerted attention is given to the construction of a broad-spectrum Index of Fiscal Responsibility, argues A. Rangachari formerly of the International Monetary Fund.
PRUDENT FISCAL management is a precondition for economic and social development. Without sound fiscal health a country's economy will be ruined. Fiscal discipline is crucial for investor confidence.
Fiscal sickness is a grave problem in India. Many State governments are already technically bankrupt while many others are just short of being terminally ill. The Union Government finances are under great strain; interest on public debt eats away half of revenue receipts and even current consumption expenditure is financed by borrowing (Rs. 78,821 crores in 2001-02). Both the Central and State governments continue to spend recklessly and do not take any serious steps to mobilise resources and streamline revenue collections. Fiscal indiscipline is rampant.
India is faced with chronic fiscal deficits financing unproductive expenditure. A belated sign of recognition of the gravity of the problem is the recent introduction of Fiscal Responsibility and Budget Management Bill for the Union Government. Urgent action is, therefore, necessary to devise suitable ways of assessing and monitoring fiscal performance. There are established systems of rating the overall economic prospects but there seems to be no specific comprehensive Fiscal Responsibility Index (FRI) as such. This index can be used to rate the government bonds. It can also help implement any incentives which the Union Government may want to extend to States showing fiscal discipline. Construction of the index touches many aspects which have to be given suitable weightage. These are set out in the succeeding paragraphs. Code of responsible fiscal management covers policy, management and monitoring aspects and FRI should include criteria to assess and reflect the performance in these areas.
Fiscal policy parameters
* Clear statement of fiscal policy objectives and the specific taxation and expenditure measures to achieve these, in the medium term and in the annual budget consistent with the medium term policy (budget year plus two succeeding years).
* Comprehensive and quantitative macroeconomic framework based on explicit economic assumptions and parameters such as inflation rate, growth rate and exchange rate.
* Reliability of economic and cost assumptions and how realistic are the macroeconomic, revenue and expenditure projections. Identification of major risks, their quantification and provision of contingency reserves. Regard for sanctity of the original budget and confining the supplementary demands to the minimum to meet unforeseeable expenditure.
* Extending tax and non-tax coverage.
* Clear prioritisation of expenditure and reduction/ elimination of revenue deficit through elimination of non-essential, non-productive and populist expenditure and schemes. Ensuring the quality of expenditure and utilising borrowed funds (fiscal deficit) only for productive and priority schemes and projects.
Redefining the role and functions of government to serve as facilitator of growth leading to elimination of irrelevant activities and redundant manpower. This involves identifying what government should do and pay for, what government should pay for but should not do and what government should neither do nor pay for.
* Doing away with unmerited subsidies and reducing the burden of essential subsidies through cost effective measures and targeting.
Fiscal management parameters
* Avoiding/ minimising time and cost overruns in implementing projects. Taking up new projects only after ensuring sustainable funds. Elimination of delays in executing projects funded by external assistance to avoid payment of commitment charges for non-utilisation of assistance.
* Optimum utilisation of existing assets, equipment and facilities.
* Broader accountability for expenditure in terms of targeted output and effectiveness in addition to financial compliance and rectitude.
* Steps taken to reduce dependence of public sector units and autonomous and statutory bodies on government budget.
* Control over contingent liabilities due to guarantees given by government to third parties for loans taken by them. Amounts paid from government budget on invocation of these guarantees. Analysis of such liabilities on the lines of non-performing assets. This is particularly important in view of increase in guarantees and more insistences of government having to step in (for example, Enron power project).
Comprehensiveness of budget to include all quasi-fiscal expenditure (for example huge subsidy on kerosene and cooking gas now excluded from Union Budget).
* Ensuring prompt settlement of bills for goods supplied and services rendered (identifying extent of arrears in this regard).
* Effectiveness of steps taken to reduce/ eliminate arrears in collection of tax and cost of collection. Whether tax expenditure (revenue forgone due to tax exemptions and concessions) is now relevant and is achieving the intended purposes.
* Updating user charges on the basis of current costs and improving the quality of services and goods.
* Action taken to collect repayments and interest in respect of loans given by government (Arrears and write-offs of such dues).
Availability of realistic cash flow projections in support of the budget to facilitate least cost borrowing. Financing deficits by market borrowing instead of by borrowing from the Reserve Bank of India.
Construction of a comprehensive Fiscal responsibility Index involves many disciplines, skills and agencies. Reliable and timely data have to be generated covering all the aspects detailed in the preceding paragraphs and for periods for more than one year.
Frequency of updating the index is another issue for consideration. The Union Ministry of Finance is the appropriate agency to do this exercise in collaboration with the Reserve Bank of India and assisted by economists, statisticians and accountants.
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