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Cheeky Fiscal Reforms Can't Substitute Substantive Ones

AUGUST 09, 2017

By TIOL Edit Team

MODI Government is undertaking fiscal reforms by stealth. While the strategy to sneak in regular but small price hikes to reduce subsidy on vote-sensitive products might by politically wise, it is certainly not in consonance with internationally accepted canons of fiscal transparency.

Cheeky reforms cannot hide the delay in Government's decisions on substantive fiscal reforms recommended by Finance Commission, FRBM Review Committee, International Monetary Fund (IMF) and Asian Development Bank (ADB), Comptroller & Auditor General (CAG) and other institutions.

Before coming to substantive reforms especially the ones recommended by ADB, an elaboration of fiscal reforms without proper and timely disclosure would be in order.

The Government has been egging public sector oil marketing companies (OMCs) to hike retail prices of subsidized, domestic LPG and kerosene in small doses every month beginning July 2016 to reduce subsidies. The Government admitted this recently in reply to a few questions in Parliament.

The Answer to a question dated 2nd August 2017 reads as: " To rationalize the subsidy burden, the Government has authorized PSU OMCs to increase the effective price of subsidized Domestic LPG by Rs. 2 per cylinder (excluding state taxes), from 1st July 2016. This has been further rationalized by moderate increase in price of Rs.4 per cylinder per month effective June 2017 ".

The Government also directed OMCs to hike price of kerosene, the poor families' fuel, in small doses aggregating to Rs. 3.23 per litre (excluding VAT) during July 2016-February 2017. OMCs were later asked to increase kerosene price by 25 paisa per litre per fortnight from 1st April 2017 to 31st July 2017 or until further orders whichever is earliest.

The Government now intends to tinker with excessively subsidized urea, a product that has been subject of subsidy reforms by several committees over the years. The Government has not acted on recommendations of any of these committees as urea is hot political potato. It thus wants to reduce subsidy not by increasing price but by reducing the weight/size of urea bag by 5Kg to 45 kg.

A leading daily broke this news with headline 'Centre's urea bag trick to save 6,000-7,000cr subsidy annually '.

In reply to a question during the ongoing monsoon session of Parliament, the Fertilizers department disclosed: " since farmers mostly assess the requirement of urea in terms of bags for agriculture purpose, it is felt that if the urea is made available in 45 Kg bags instead of 50 Kg, the consumption of urea may further come down which will also lead to balanced fertilization and also increase the yield in the range of 7 to 12% in different crops. This proposal is currently under examination in the Department ".

Coming to delayed substantive reforms, ADB has enriched the fiscal reforms agenda by making a slew of recommendations and observations in a working paper (WP) released in July 2017.

Captioned 'Fiscal Responsibility and Budget Management Act in India: A Review and Recommendations for Reform' WP observes: "India has stayed with what are called traditional first generation fiscal rules and their associated challenges. Meanwhile, many advanced and emerging market economies have moved on to a second generation of fiscal rules".

ADB has thus suggested two alternative combinations of fiscal rules that Modi Government can consider for the next generation of fiscal reforms. The options are: 1) adopt an expenditure rule, which sets expenditure targets that are consistent with a desirable, stationary or declining public debt-to-GDP ratio. 2) Adopt a fiscal rule that sets a target for the level of structural deficit consistent with a desired, stationary level of public debt.

Under the first option, the Government can replace Fiscal Responsibility and Budget Management (FRBM) Act , 2003 with a new Debt ceiling & Fiscal Responsibility law under Article 292 of the Constitution as suggested by 14th Finance Commission.

ADB's other recommendations are: Establish an Independent Fiscal Institution; Introduce a Fiscal Stability Report; Improve the Linkage between Fiscal Policy and Strategy and Budget Operations; Introduce State Credit Ratings and Better Sharing of Responsibilities between Centre and States for Stabilization and Sustainability.

ADB had prepared the working paper following a request from FRBM Review Committee to study on global best practices relating to the next generation framework.

Finance Ministry is yet to take decision on recommendations of this committee that submitted its report in January 2017.

In his budget speech for 2017-18, Finance Minister Arun Jaitley stated: "The Report of the Committee will be carefully examined and appropriate decisions taken in due course" .

In an earlier editorial, TIOL had hoped that Finance Ministry would accept its recommendations. We had suggested that the Government should unveil a roadmap for fiscally responsibly, inclusive and robust growth during the Monsoon session of Parliament.

We again urge the Government to bite the bullet on credible and accountable fiscal reforms in the long-term interest of the country.