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Fiscal agenda for the new government
May, 25th 2009

Concrete steps towards sustainable fiscal stability with a time bound action plan should be the key factor in the fiscal agenda of the post election government.

The budget for 2009-10 presented by the Finance Minister in February was a tame vote on account pending elections. But the Revised Estimates for 2008-09 reveals many startling facts reflecting mainly the fiscal stimulus packages announced by the government.

Most striking features are the substantial step up of expenditure in one year, steep fall in revenue and explosive increase in budget deficit.

The qualitative changes are equally significant. Non-Plan expenditure increase is Rs. 1,10,498 crore out of the total step up of Rs. 1,50,069 crore. Revenue expenditure, that is, on current consumption shows a major increase of Rs. 1,45,327 crore and capital expenditure, that is, on creation of assets a meagre Rs. 4,742 crore out of the total increase of Rs. 1,50,069 crore. The fall in receipts is in tax revenue, the non-tax revenue estimate showing a marginal increase.

The revised budget estimates for 2008-09 raise many important issues with medium and long term fiscal repercussions.

The first issue is the ability of the government to handle the massive increase of expenditure efficiently to derive the expected benefit. Areas of concern are making budget provisions without working out details of the project or scheme, non preparation of project reports and inadequate project reports, and deficiencies in implementation resulting in large time and cost overruns.

A shift in implementation of plan schemes by transfer of central plan assistance Rs. 87,053 crore directly to state district level autonomous body societies and non-government organisations and not through State governments poses special problems in monitoring the use of funds efficiently for the purpose intended. The adequacy of financial capacity and initial records at these levels deserves attention.

Special arrangements like special purpose vehicles (SPV) and Public Private Partnership (PPP) raise problems in monitoring whether full benefits of government funding are realised.

A major item in the infrastructure stimulus announced in 2008-09 focuses on financing through government guaranteed bonds of India Infrastructure Finance Company (a government owned SPV) for Rs. 30,000 crore, with no project details.

Supervisory mechanism

The Comptroller and Auditor General of India, in a recent review of PPP projects implemented by the National Highways Authority of India, has stressed the need for strengthening supervisory mechanism and corrective action for timely execution.

The high deficit highlighted earlier is itself an understatement. It excludes many off budget items like fuel and fertilizer bonds. We have also to reckon the budgetary implications of the post budget sanction of DA for government employees (Rs. 6,000 crore annually) and the excise and service tax post budget cut of Rs. 30,000 crore annually and the impact of the Thirteenth Finance Commission .

The State governments have been allowed Rs. 30,000 crore additional borrowings in 2008-09 (again no details on schemes to be financed) which will have to be added when estimating the overall government deficit.

Sustainability of such a large debt in the medium and long term is a matter of concern. Specific steps are necessary to ensure accountability for public expenditure of such high order like availability of detailed scheme and project reports for the stimulus expenditure spelling out the targets, efficient implementation, continuous monitoring, corrective action where needed and periodical progress reports.

The lessons learnt from output and outcome budgeting need to be spelt out with corrective action to improve such monitoring. This should be extended to non-Plan expenditure also as it is sizable.

Review of ongoing schemes, projects and activities is crucial to eliminate non-priority and non-productive expenditure. This should cover Plan and non-Plan expenditure including subsidies. The Finance Minister had in the context of output budgeting had assured that programmes and schemes will not be allowed to continue indefinitely from one Plan period to another without an independent and in depth evaluation. It is relevant to note that in the U.S. the President has formed a three man team to help break Washingtons bad habits of wasteful spending to contain the adverse impact of fiscal stimulus.

Monitoring of schemes implemented by direct transfer of funds to autonomous bodies, non-government organisations and SPVs has to be streamlined. Revenue agenda items include collection of arrears, review of tax exemptions (Rs. 2,78,644 crore in 2007-08) and improving the efficiency of collection , targeting tax evasion and parking of funds in tax havens and updating user charges for non-tax revenue. (Tax exemptions are not shown as a separate budget item and not subject to Parliament approval).

Amendment of Financial Responsibility and Budget Management (FRBM) Act, 2003, should be in the fiscal action plan of the new government. A Fiscal Code of Conduct has to be prepared as guideline for proper implementation of the Act in letter and spirit. Till now we have seen a mechanical compliance with quantitative targets and efforts to stick to deficit targets through off budget items rather than focusing on the basic revenue and expenditure reforms. The Central Government should also use its leverage in transfer of central assistance to instil fiscal discipline in States. Fiscal Responsibility Index based on performance parameters in Fiscal Code of Conduct can be devised to measure fiscal performance. Medium term three year forecast mandatory under the FRBM Act can be made more useful with disaggregated data on expenditure and revenue projections on realistic assumptions spelt out in the forecast. Reform in government accounting will help to identify undischarged liabilities and make medium term projections more explicit and realistic.

Concrete steps towards sustainable fiscal stability with a time bound action plan should be the key factor in the fiscal agenda of the post election government. This will spur economic upturn, revive confidence in stock exchange and encourage flow of foreign direct investment. Results of progress can be periodically publicized through various means of media including internet.

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