Slipped fisc Cabinet ministers are typically not known to speak in anything less than glowing terms about the future prospects of the economy when elections are just round the corner. That is why it is a refreshing change to hear the finance minister, Mr Yashwant Sinha, warning the country about the precarious state of government finances. Speaking at a recent meeting organized by the Federation of Indian Chambers of Commerce and Industry, Mr Sinha has declared that the economy is headed for an internal debt trap unless members of the next Lok Sabha arrive at a consensus to adopt the fiscal responsibility act which will make it obligatory upon the government to meet revenue and expenditure targets set forth in the budget. This warning is long overdue. Successive governments have at best paid lip service to the need to maintain fiscal discipline. In recent years, Indian budgets have borne a close resemblance to fairy tales. Even a cursory look is enough to convince the discerning observer that the budget estimates are quite far away from reality. Revenue collections are almost always overestimated because they are based on projected rates of growth which never materialize. Once actual rates of growth fall below the projected rates, the lower level of industrial production results in smaller excise and customs duty collections. The shortfall in revenue has been accentuated in the last couple of years because the government has failed to satisfy accruals expected from the disinvestment of public sector equity. On the other hand, finance ministers typically underestimate government expenditure. The problem has been aggravated because ruling coalitions have been large and unwieldy. Each coalition partner has stalled any attempt to economize on expenditure whenever cuts affect their particular vote banks. The inordinately long interval of fiscal profligacy has brought us to a situation where fully 40 per cent of revenue collections are spent on interest payments. To this must be added other items of committed expenditure such as food and fertilizer subsidies as well as defence expenditure. The Kargil invasion will surely lead to pressures to increase defence expenditure, while different lobbies will work overtime to thwart any attempt to cut subsidies. Against this background, it is not farfetched to imagine a situation where the government has to borrow from the public even to meet its statutory obligations. Unfortunately, Mr Sinha?s suggestion of a fiscal responsibility act may go only part of the way in redressing the situation because it is difficult to finetune such a piece of legislation. There must be increasing awareness that the only viable solution is to effect a drastic reduction in the level of subsidies. Several studies have shown that populist measures such as the public distribution system are poorly targetted. At the same time, these constitute a tremendous drain on government resources. It should also be obligatory on the part of the government to use the proceeds from the disinvestment exercise to reduce public debt. It is not sound financial practice for a household to use the family silver to pay for current expenditure. The same principle applies to the government. Finally, it is imperative to have an autonomous institution, free from the pressures of electoral politics, to act as a watchdog over the activities of the government. An appropriate institution for this purpose is the Reserve Bank of India, which can be entrusted with the power to regulate the overall level of government borrowing.