An Act in haste

Published : Aug 13, 2004 00:00 IST

The Fiscal Responsibility and Budget Management Act, promptly notified by the UPA government soon after taking office, is undemocratic in that it can force the government to cut expenditures that are required to enforce its popular mandate.

WHEN the United Progressive Alliance (UPA) government assumed office, two important Bills had been passed by Parliament. These Bills were very different in nature. One is inherently democratic and progressive, the other essentially rigid and anti-democratic in its implications. So far, only one of them has actually been notified by the government and the choice of the more undemocratic Bill for notification sends out unfortunate signals about the goals and priorities of the Congress-led government.

The first - the Right to Information Act - is designed to strengthen and deepen the democratic process, and is the outcome of a prolonged struggle by people's movements and civil society organisations. It would enable much greater access to important information for ordinary citizens about a wide range of government activities at all levels, and would, therefore, not only lead to greater accountability but also reduce possibilities of corruption and the unfair granting of favours or harassment.

However, until the last week of July the Bill had not been notified, which effectively means that it has not yet passed into law and, therefore, cannot be implemented. The causes for delay in notifying it are not evident, since there are no legal hurdles to be cleared. The fact that the government has not done so, despite continuing popular pressure and representations by prominent citizens, suggests that freedom of information for the ordinary citizen is not a priority for the government.

This sluggishness is in sharp contrast to the alacrity with which the second piece of legislation - the Fiscal Responsibility and Budget Management Act (henceforth FRBM Act) - was notified by the government. This was one of the first undertakings of the UPA government - and indeed its first legislative action. This Act was notified on July 2, to come into force on July 5, only three days before the presentation of the Annual Budget, thereby circumscribing the entire budgetary exercise from the start of the new government's tenure.

The FRBM Act is apparently well intentioned, designed to clean up public finances and put them on a sustainable footing. Thus, it requires the reduction of the fiscal deficit and the elimination of the revenue deficit of the Central government by March 31, 2008 (the deadline is to be extended by a year). This would appear to be a way of forcing the government to adhere to a discipline that would thereby allow it to spend more on useful capital expenditure.

However, the actual implications of the working of the Act are much more serious and potentially adverse than is generally understood. The Act requires the Central government to reduce the fiscal deficit by 0.3 per cent of gross domestic product (GDP) each year, and the revenue deficit by 0.5 per cent, beginning with this financial year. If this is not achieved through higher tax revenues, the necessary adjustment has to be made by cutting expenditures.

Further, the Act prohibits the Central government from borrowing from the Reserve Bank of India (that is deficit financing, involving the printing of money) to meet its deficit, except for temporary cash advances. This effectively rules out a cheap source of borrowing and forces the government to borrow at much higher rates, for no evident reason.

The argument that deficit financing causes inflation is not just simply wrong. It is now widely acknowledged across the world to be ridiculous and completely unwarranted, especially in the financially sophisticated world we live in. So inflation control does not at all depend upon controlling the Central government's borrowing directly from RBI.

So, this directive does not serve any useful purpose. Instead, it forces the government to pay unnecessarily much higher interest on all its debt, instead of allowing for some low interest debt to RBI. This raises the interest cost of the government and thereby the total revenue expenditure, perversely making it harder to achieve the revenue deficit targets. It is hard to understand why this portion of the Act has been retained even when earlier discussion in Parliament pointed to the absurdity of this condition.

But the most worrying - and potentially undemocratic - part of the FRBM Act relates to compliance conditions. The Act states: "Whenever there is a shortfall in revenue or excess of expenditure over the pre-specified levels... .the Central government shall take appropriate measures for increasing revenue or for reducing the expenditure (including curtailing of the sums authorised to be paid and applied for from and out of the Consolidated Fund of India under any Act so as to provide for appropriation of such sums)."

The notification spells this out even more clearly: "In case the outcome of the quarterly review of trend in receipts and expenditure... at the end of any financial year... shows that:

(i) the total non-debt receipts are less than 40 per cent of the Budget Estimates for that year; or (ii) the fiscal deficit is higher than 45 per cent of the Budget Estimates for that year; or (iii) the revenue deficit is higher than 45 per cent of the Budget Estimates for that year, then... the Central government shall take appropriate corrective measures."

This means that if any of these conditions holds (which is very likely in most years) the government will in effect be forced to cut expenditures even if they are essential for the economy, or required to enforce its popular mandate or to deliver the socio-economic rights of the citizens.

This is going to hit home much faster than many people realise. Budget 2004 contains what are widely recognised to be inflated and highly optimistic revenue receipt projections. Also, the overwhelming part of additional resource mobilisation in the budget is back-loaded, to be available only after September. In addition, the truant monsoon is bound to depress revenues. By September, it is not just likely but almost inevitable that the actual revenue receipts will fall short of the Budget estimates by 40 per cent or more.

When that happens, according to the Act that has just been notified, the government will be required to cut back on expenditure. This means that even the low and inadequate provisions for employment, education and other goals listed in the National Common Minimum Programme will be further cut, and may not even increase at all.

Much of the opposition to the expenditures projected in the Budget has focussed on the low additional outlays for critical and socially necessary areas, which has been seen as a betrayal of the people's mandate. The total budgeted for these is only Rs.10,000 crores, but imagine the situation if even this small additional outlay is not actually provided, because of the constraint posed by the FRBM Act.

There may be even worse to come. The fearsome combination of heavy floods and severe drought that is affecting different parts of the country is bound to result in lower incomes and thus lower tax collections, as already stated. But it should also require much larger outlays to provide even the most minimal relief to the affected people who are spread across India. Even such critical relief and rehabilitation - including in the form of rural employment and other physical assistance - may be under threat from the absurdly rigid fiscal discipline imposed by the Act.

The problems with such fiscal responsibility legislation across the world are now becoming more and more evident. The Gramm-Rudman-Hollings legislation in the United States, which was the international front-runner in this regard, is now really honoured only in the breach, through shifting many expenditures of the U.S. Federal government to off-budget heads. In the European Union, the Growth and Stability Pact, which provides similar constraints, is coming under severe pressure, and France and Germany are already seeking ways to make it effectively meaningless and inapplicable to actual fiscal policy.

Clearly, therefore, this is not just a foolish piece of legislation but also fundamentally undemocratic and possibly even unconstitutional. The new government should without delay reconsider this Act, with a view to repealing it, if it is to remain responsive and accountable to its citizenry, rather than following the dictates of the highly dubious economic logic favoured by international investors.

There is, of course, another (more sordid) way of dealing with this mess. Instead of recognising the wrongheaded nature of this legislation, the government could simply choose to live with it and try to circumvent it through "creative accounting" - or more crudely, fixing the books.

While this may turn out to be better for the people than actually enforcing expenditure cuts, it is certainly undesirable because it promotes even more lack of transparency within the government, and less open accountability to the people. It is quite well recognised that such off-budget padding is not only less accessible to the final recipients but also inefficient fiscally.

But come to think of it, such book-fixing and creative accounting is feasible only if the books can be kept reasonably secret and not open to public scrutiny. So, maybe, this is the real reason why the Right to Information Act is still not being notified.

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