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NDA Govt plays politically safe; shuns major fiscal reforms

APRIL 23, 2018

By TIOL Edit Team

THE Finance Ministry has frittered away a rare opportunity to undertake fiscal reforms as mooted by successive Finance Commissions, FRBM Review Committee (FRBMRC) and CAG.

This is the unmistakable conclusion anyone would arrive at after reading Fiscal Responsibility and Budget Management (Amendment) Rules, 2018 notified on 2 nd April. The reading has to be coupled with reference to amendments to FRBM Act 2003 undertaken through Finance Act, 2018.

Instead of enacting a new law , NDA Government has tinkered with FRBM Act and rules as done by previous Governments to accommodate their political compulsions. The latest tinkering is however, a blend of both good and bad amendments .

The commendable goals incorporated as amendment to FRBM Act is a resolve to ensure that the 1) the country's total Government debt does not exceed 60% of gross domestic product (GDP) & 2) the Central Government debt does not exceed 40% of GDP by the end of financial year 2024-2025.

FRBMRC had recommended that 60% cap on India's total government debt should be achieved in 2022-23 by phased reduction in borrowings.

Another good amendment is the provision to give inkling about proposed changes in taxes and expenditure in the coming years .This disclosure has to be made in Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement.

As put by FRBM (Amendment) Rules, 2018, “major changes proposed to be introduced in direct and indirect taxes in the ensuing financial year will be presented. It (Statement) shall contain an assessment of income tax exemption limits and how far it relates to per capita income, principles regarding tax exemptions and target group for exemptions ".

The new Rules require the Ministry to "specify the tax-GDP ratio for the current year and subsequent two years with an assessment of the changes required for achieving it ".

According to the Rules, "It may discuss the non-tax revenues and the policies concerning the same. An assessment of the capital receipts may be made, including the borrowings and other liabilities, as per policies spelt out. The Statementmay also give projections for GDP and discuss it on the basis of assumptions underlying the indicators. Expenditure on revenue account may also be made with particular emphasis on the measures proposed to meet the overall objectives ".

The deplorable amendment is the removal of revenue deficit (RD) as a statutory deficit indicator and the consequent requirement of specifying yearly targets for phased elimination of RD. The original target for elimination of RD by 31 st March 2008 as stipulated by FRBM Act 2003 was deferred repeatedly through subsequent amendments.

The trashing of a statutory target that could never be achieved makes a mockery of fiscal discipline. RD would, henceforth be merely reported as percentage of GDP for record and reference only as would be the primary deficit as percentage of GDP.

The Amendment, leading to removal of effective RD (ERD) as statutory indicator is in keeping with the recommendation of fourteenth Finance Commission (FFC). Incorporated in 2012 through an amendment to FRBM Act, ERD was considered as creative budgeting tool by FFC. It had thus recommended its removal.

With this, the only statutory deficit indicator is fiscal deficit (FD).

According to FRBM (Amendment) Rules 2018, the Central Government shall reduce FD by an amount equivalent to 0.1 per cent or more of GDP at the end of each financial year beginning with the financial year 2018-19, so that FD isbrought down to not more than 3 per cent of the GDP by 31st day of March, 2021.

It is shocking to find that successive governments have not moved beyond the 3% FD and have instead kept pushing this goalpost to suit their fiscal laxity. This 3% FD target was to be achieved by 31 st March 2008 as envisaged under FRBM Rules 2004.

FD & RD targets, as recommended by FCs,FRBMRC and other similar panels, have perhaps never been complied with by the Government of the day.

One can't make a head or tail of latest amendments to FRBM Act and rules without referring back and forth to original enactment and rules and subsequent amendments.

The Ministry must end this fiscal obfuscation by enacting a new FRBM Act and framing new rules. It might well stick to sum and substance of the existing framework. Simplicity of legal framework is a pre-requisite for assessing compliance with the law.

The Governmentalso ought to take the nation into confidence for its decision to not act on FRBMRC's recommendation to repeal the present law and introduce a new legislation captioned ‘The Debt Management and Fiscal Responsibility Bill, 2017'.

It should also explain why it overlooked FFC's similar recommendation to "replace the existing FRBM Act with a Debt Ceiling and Fiscal Responsibility Legislation, specifically invoking Article 292 in its preamble. This could be an alternative to amending the existing FRBM Act as proposed by us. We urge the State Governments also to consider similar enactments under Article 293(1)."

The Government also owes an explanation to the nation for its reluctance to constitute an independent fiscal council, recommended by both FC and FRBMRC.

At the global level, Fiscal council is today deemed as benchmark for fiscal accountability and compliance by governments. As many as 39 countries had constituted such bodies by December 2016.

We hope the Government would introspect over the implications of India being saddled with first-generation fiscal rulesand for its reluctance to independent assessment of its compliance with fiscal rules.


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