AUGUST 05, 2024

By Naresh Minocha, Consulting Editor

UNVEIL Inter-Generational Equity Policy as part of fiscal reforms.

"The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5 per cent next year. The Government is committed to staying the course. From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as percentage of GDP."

With this impressive self-certification, Finance Minister Nirmala Sitharaman concluded Part A of her 2024-25 budget speech on 23rd July 2024. The certification is backed with eye-popping claims tucked away in one of the budget documents titled 'Statements of Fiscal Policy' (SFP).

The document comprises two statements that were earlier presented as separate documents. These are: 1) Macro-Economic Framework Statement (MEFS) and 2) Medium Term Fiscal Policy (MTFS) cum Fiscal Policy Strategy Statement (FPSS).

One would have to struggle to close popped-up eyes after reading all claims in the latest & previous SFPs, four-times amended Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and many times more-altered FRBM rules.

One should weigh official claims against recommendations on fiscal discipline & accountability made by successive Finance Commissions, IMF's country reports on India, Finance Ministry-appointed expert committees' reports & independent studies from Asian Development Bank and institutions such as Indian Management Institutes.

SFP says: "An active and nimble fiscal policy strategy is a pre-requisite for smooth fiscal policy operations." It adds: "Pre-fixed annual targets for fiscal consolidation have not been proposed as they may become too restrictive in an uncertain environment."

Fiscal Policy has been on the "glide path" ever since 2018. This might be the longest period for fiscal policy sailing with ballooning debt with no certainty as to when it will land on a debt-sustainable surface.

This is Finance Ministry's longest quest for nimble policy strategy under Nirmalaji's leadership for return to fiscally safe turf (FRBM law). The turf was laid by Vajpayee Government in 2003. It was re-laid twice by its successor regime UPA in 2004 & 2012. It was again re-laid twice by Mr. Jaitley in 2015 & 2018.

During its violations-battered (read deviations in official parlance) journey since 2003, FRBM law has become a convenient tool for both the Centre and the States to play around with responsibility that comes with unfettered powers to raise and splurge money on freebies including corporate incentives. Before detailing amazing deviations during the last five years, consider the current debt burden from the standpoint of inter-generational equity (IEG), which is the principal objective of FRBM.

The Centre's debt has almost doubled in seven years from Rs 93.26 lakh crore (49.3% of GDP) in 2018-19 to budgeted estimate of Rs 185.27 lakh crore (56.8% of GDP) in 2024-25.

The interest paid on borrowings has doubled from Rs 5.87 lakh crore (revised estimate for 2018-19) to Rs 11.63 lakh crore (2024-25 budget estimate) during the same period. Interest payments constitute the largest component of revenue expenditure (RE), accounting for 31.35% of estimated RE of Rs 37.09 lakh crore for 2024-25.

Interest payment of Rs 11.63 lakh crore also accounts for the lion's share (72.10%) of fiscal deficit of Rs 16.13 lakh crore estimated by 2024-25 budget.

The estimated interest payment for 2024-25 is 3.6% of GDP. This percentage is more than fiscal deficit of 3%, which was required to be achieved by 31st March 2008 under FRBM Rules, 2004.

This 3% target for fiscal deficit has never been achieved by the Centre and is unlikely to be achieved as long as FRBM law remains a toothless wonder and the Government's actions under it are beyond the purview of judicial scrutiny.

FRBM Act has built-in Kavach/protection (sovereign immunity) against any violation (deviation in official parlance) of this law and its rules.

It remains to be seen whether the Supreme Court would take a stance on this while hearing bunch of public interest litigations against explosive growth of freebies.

Would FRBM ever pave a sustainable debt-led path to Viksit Bharat?

Would Parliament debate FRBM's relevance during the current budget session? Let Parliament first seek tabling of FRBM compliance report of CAG for 2022-23 & 2023-24 as vital inputs for serious debate on inter-generational equity.

Mrs Sitharaman has not yet disclosed when & whether she would amend FRBM law – a promise she made in her 2021-22 budget speech. Mrs. Sitharaman had stated: "Towards achieving Central Government fiscal deficit along the broad path that I have already indicated; I will be introducing an amendment to the FRBM Act." The Government affirmed this resolve later in a reply to a Parliament question.

It remains to be seen whether the amendment would be modest or radical in keeping with 15th Finance Commission (FC) report submitted to Government during November 2020.

It recommended setting up a "High-powered Inter-governmental Group" to draw "the time-table for defining and achieving debt sustainability". It also called for "major restructuring" of FRBM Act.

As put by FC, "This High-powered Group can craft the new FRBM framework and oversee its implementation. It is important that the Union and State Governments amend their FRBM Acts, based on the recommendations of the Group, so as to ensure that their legislations are consistent with the fiscal sustainability framework put in place."

15th FC stated: "This High-powered Group can craft the new FRBM framework and oversee its implementation. It is important that the Union and State Governments amend their FRBM Acts, based on the recommendations of the Group, so as to ensure that their legislations are consistent with the fiscal sustainability framework put in place."

In its action taken memorandum on 15th FC's report presented to Parliament on 1st February 2021, the Government stated FC's "recommendations related to the fiscal road map for the States and amendments to the FRBM Act will be examined separately."

The Finance Ministry changed its stance on altering FRBM Act on 1st February 2022. In one of the 2022-23 budget documents, it stated: "it is vital for the Government to retain requisite fiscal flexibility to effectively respond to emerging contingencies till the pandemic-induced uncertainties ease. Hence, amendment to FRBM law is not being proposed."

Comptroller & Auditor General (CAG) in its latest available annual report on the Centre's compliance with FRBM Act for 2021-22 explains: "Debt sustainability is defined as the ability of the Government to maintain a constant Debt to GDP ratio over a period and the ability to service its debt."

CAG report says: "Debt sustainability analysis revealed that while the Debt-GDP ratio was around 49 per cent during 2016-17 to 2018-19, an increasing trend was seen during 2019-20 and 2020-21. The debt growth rate outgrew the GDP growth resulting in an increased Debt-GDP ratio of 52.33 per cent, and 61.57 per cent in financial year 2019-20 and 2020-21 respectively."

Connect Mrs. Sitharaman's nebulous target for debt-to-GDP in 2026-27 with crystal-clear targets set by late Arun Jaitley ji to cap the Centre's debt as well as the combined debt of the Centre and States (government debt).

Mr. Jaitley articulated his decision in his last budget speech for 2018-19 & Finance Bill, 2018. The resulting amendments to FRBM Act became effective on 31st March 2018.

A key provision of the amended law stipulates: "The Central Government shall- (a) take appropriate measures to limit the fiscal deficit up to three per cent. of gross domestic product by the 31st March, 2021; (b) endeavour to ensure that- (i) the general Government debt does not exceed sixty per cent.; (ii) the Central Government debt does not exceed forty per cent of gross domestic product by the end of financial year 2024-2025; (c) not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of one-half per cent. of gross domestic product, in any financial year; (d) endeavour to ensure that the fiscal targets specified in clauses (a) and (b) are not exceeded after stipulated target dates."

The inter-linking of Mrs. Sitharaman's 2024-25 speech with Jaitley's 2018-19 speech would make us fathom the fiscal quagmire in which Modi Government has slipped in.

The glide path towards debt sustainability envisioned by Mr Jaitley is turning out to be regular, yearly non-compliance of key provisions of FRBM Act.

The SFP, for instance, has been bereft of projections or rolling targets for six key indicators for next two years since 2020-21. The six fiscal indicators are: fiscal deficit, revenue deficit, primary deficit, gross tax revenue, non-tax revenue and central government debt. The rolling targets are backed by underlying assumptions. These help investors, entrepreneurs, economists and analysts get an idea of where the economy is expected to move over the medium-term.

The SFP 2024-25 thus says: "As on date, the Fiscal Deficit is the only operational target for fiscal consolidation." It adds: "Rolling targets for next two years have not been provided."

The SFP has justified this opacity in fiscal governance as: "With continued global uncertainty and potential new avenues of conflict still open, prudence demands that the Government retain fiscal flexibility to be able to effectively respond to the potential unforeseen challenges."

The second major instance of violation (deviation in official parlance) of FRBM Act is decision to not present annual Medium-term Expenditure Framework (MTEF) to Parliament for the fifth consecutive year!

In the Interim Budget for 2024-25 presented in February 2024, Finance Ministry justified black-out of MTEF statement for 2023-24 by citing lingering "global uncertainty" sustained by "newer geo-political challenges."

It stated: "In order to retain requisite fiscal flexibility to effectively respond to the emerging challenges, the Government is unable to place the Medium-term Expenditure Framework Statement in FY 2023-24 before both Houses of Parliament as mandated under Section 3(1B) of the FRBM Act."

MTEF statement was introduced through the 2012 amendment to FRBM Act. This Statement has to be presented to Parliament under FRBM Act in the session beginning immediately after the one in which budget is presented. MTEF comprises three-year rolling targets for several expenditure indicators along with the underlying assumptions.

The crucial importance of MTEF statement is aptly explained in the official circular issued in June 2013. It says MTEF "plays a crucial role in laying down the medium term and long-term fiscal policy of the Government. It provides a credible roadmap for the intention of the Government to contain the deficit to predefined levels."

The circular continues: "It has also acted as an effective standing point for preparation of next budget. Since it is a rolling plan, it adapts to the changes in overall macroeconomic conditions. An effective medium term fiscal plan is one that is tightly integrated with the budget and one which forms a credible foundation for the upcoming budgets."

The inter-connection of speeches would also show the Finance Ministry's persisting hesitation to embrace credible fiscal reforms. This is confirmed by the absence of mention of 'fiscal reforms' in the notified terms of reference for the 16th Finance Commission (FC). It is perhaps for the first time that the job of FRBM review has not been assigned to FC.

The Government's indifference towards policy paralysis on fiscal compliance and reform is understandable from this fact:

Mr. Jaitley stated on 1st February 2018: "In order to impart unquestionable credibility to the Government's commitment for the revised fiscal glide path, I am proposing to accept key recommendations of the Fiscal Reform and Budget Management (FRBM) Committee relating to adoption of the Debt Rule and to bring down Central Government's Debt to GDP ratio to 40%. Government has also accepted the recommendation to use Fiscal Deficit target as the key operational parameter. Necessary amendment proposals are included in the Finance Bill."

These targets don't figure in the first budget of NDA Government in its third term. These have been trashed in the same way as UPA regime did to the original targets specified in FRBM Act, 2003 and FRBM Rules, 2004. It too refixed fiscal and revenue deficit targets with new timelines through 2012 amendment to the Act and a slew of alterations in FRBM Rules. UPA failed to achieve these too.

Arrival of Covid-19 proved handy for the Modi Government to ignore the Lakshman Rekha of fiscal discipline drawn by Mr. Jaitley. Now that the pandemic has gone and the economy is in rock-&-roll mode, there is no reason why NDA regime should delay endlessly in realizing Jaitleyji's vision.

Mr. Jaitley's vision is reflected in his recall of the fact in Rajya Sabha during 2016 that IEG is the "central objective" of FRBM Act. It was conceived to "ensure inter-generational equity in fiscal management."

Modi Government should revive Mr. Jaitley's vision and also formulate an inter-generational equity policy for governments assets, liabilities and natural resources.

As put by the Committee on Fiscal Statistics in its 2018 report, "A suitable policy is required to ensure inter-generational equity in the exploitation of" Government's diverse resources & assets "for not only of the present generation but for all future generations."

The importance of this concept gets reinforced if we consider fiscal deficit as deemed, deferred taxes & non-tax revenue. The latter include road toll & telecom licence fee paid by telecom service providers and recovered from the users as tariff.

If our country remains trapped in muddy, perennial chakravyuh of high fiscal deficit, high level of borrowings for sustaining populism, then the future generations would have to pay higher taxes and non-tax levies, leave aside inflation & depreciation / devaluation of currency.