Bill on fiscal discipline in monsoon session

By J. Venkatesan

NEW DELHI, JUNE 29. Alarmed at the large and persistent fiscal deficit, the Centre has decided to introduce the Fiscal Responsibility Bill 2000 in the monsoon session of Parliament so that better fiscal discipline is maintained.

The Bill being given finishing touches by the Law Ministry is aimed at evolving a system of capping borrowings and fiscal deficits every year and appeasing the IMF-World Bank combine, the main funding agencies. It will also ensure a mechanism by which the expenditure will be drastically cut whenever it exceeds the budget estimate.Notwithstanding the fact that fiscal consolidation is one of the main elements of economic reforms adopted in India since July 1991, the government finances continue to be a matter of serious concern. The persistent large fiscal and primary deficits have resulted in large debt build-up. Also persistence of revenue deficit emanating from growing interest burden has resulted in a vicious circle of deficit and debt.

Apart from growing fiscal imbalances that have raised the issue of fiscal sustainability and macro economic stability, the integrity of the budget has been questioned on account of continual slippages in terms of deviations from the original estimates.

According to highly placed sources, it is in this context that the need for fiscal discipline has been thought of and this can be brought about only by legislation. The idea is to keep the fiscal deficit at a reasonable level every year so that the desired annual growth rate takes place meaningfully and long-term fiscal consolidation is achieved.

Continuation of the present fiscal scenario is a matter of serious concern. Assuming that the gross domestic product (GDP) grows at 12 per cent (7 per cent real growth and 5 per cent inflation), domestic debt grows at 15 per cent, revenue receipts, revenue and capital expenditures grow at 13.5 per cent, 11.1 per cent and 13.2 per cent respectively (the same as the level of 2000-01), the revenue deficit and gross fiscal deficit would be around 2.4 per cent and 4.5 per cent of GDP, respectively at the end of fiscal 2005-06.Also the interest payments would be 5.9 per cent of GDP and domestic debt to GDP ratio around 59 per cent. A tentative calculation shows that if the revenue receipts and revenue expenditures increase at 2000-01 rate, the elimination of revenue deficit would be possible only in fiscal 2012-13.

This scenario implies severe fiscal stress and calls for bold measures either in terms of large mobilisation of resources or though expenditure management. The situation underscores the need for steeper fiscal corrections and consolidations along with an emphasis on stricter fiscal adjustment. This also implies containing fiscal and revenue deficits to moderate levels to ensure that interest payments do not result in pre-empting a greater part of revenue receipts.

By enacting the Fiscal Responsibility legislation, the Government hopes to achieve the objective of cutting down the deficit and ensuring better fiscal discipline. It is also intended to ensure adequate return on a sustained basis in respect of borrowings deployed for capital expenditure so that the revenue budget would be benefited over time from higher productivity in the economy.

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