The Telegraph
Since 1st March, 1999
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The cabinet has finally cleared the fiscal responsibility and budget management bill, and it is likely to be introduced in Parliament in the budget session. The FRBM bill has been pending since December 2000, when it was first introduced in the Lok Sabha by Mr Yashwant Sinha. Given the fiscal mess Central- and state-level finances are in, the bill was a sensible idea because it would have restrained fiscal profligacy at the Centre, although state-level restraint has to await similar legislation in the states. In its original form, the bill proposed 0.5 per cent reduction in the revenue deficit every year, with an eventual elimination in 2005-06. The fiscal deficit would be pegged at 2 per cent of the gross domestic product, government guarantees would be capped at 0.5 per cent of the GDP and annual liabilities would be pegged at 50 per cent of the GDP.

These were concrete yardsticks against which fiscal restraint could be measured, although deviations were permitted because of national calamities and security reasons. The logic was that in the absence of legislatively pre-determined hard constraints through time-bound targets, populist measures cannot be controlled or left to executive discretion. The period since December 2001 has borne this out. Barring a self-imposed attempt made by Mr Sinha in the budget for 2001-02 (pending enactment of the FRBM bill), revenue and fiscal deficits have shown no signs of decline, although it might be argued that the period since then has witnessed continual calamities and security threats. From the Lok Sabha in December 2000, the bill went to the parliamentary standing committee on finance. In its report submitted in December 2001, the committee knocked out the bill’s teeth, and it is this version that has now been cleared by the cabinet.

Having been scrutinized by a standing committee, the bill’s legislative passing is no longer a question mark. But because time-bound targets on reducing fiscal and revenue deficits and Reserve Bank of India borrowings have disappeared, the FRBM bill is no longer worth the paper it is written on, nor will expenditure be slashed if there is a revenue shortfall and safeguards have been built in to prevent judicial scrutiny. All that is mandated is annual statements on medium-term fiscal policy, fiscal strategy and the macro-economic framework. The only positive element is redefinition of fiscal deficit as total net (gross minus receipts) disbursements from the consolidated fund, ignoring repayment of debt or debt receipts. The standing committee’s view was that the Centre should have macro-economic flexibility and time-bound targets should be through rules rather than the statute itself. The cabinet has concurred. However, especially since the late Seventies, the Centre’s self-discipline has been questionable and so has Parliament’s scrutiny of profligacy. The FRBM bill retains the status quo.

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