Loans and limits

Finance Minister P. Chidambaram entering Parliament House to present the Union Budget.-KAMAL NARANG

Parliament should have effective control over the borrowings of the government and scrutinise how the loan funds are utilised.

IN his Budget speech, Finance Minister P. Chidambaram announced a massive waiver of farm loans amounting to Rs.60,000 crore. The immediate reaction of the Opposition leaders was that this was a pre-election Budget. On the other hand, there was criticism that the huge waiver remained unfunded in the Budget. The Finance Minister was initially evasive, saying that he had done his homework and would get additional revenues through better tax administration and tax buoyancy failing which he had headroom in fiscal deficit. However, while replying to the Lok Sabha debate on the Budget on March 14, he announced the release of cash compensation to the lending institutions in the following manner: (i) Rs.25,000 crore to be paid immediately after June 30, through the first Supplementary Budget; (ii) Rs.15,000 crore in Budget 2009-10; (iii) Rs.12,000 crore in Budget 2010-11; and Rs.8,000 crore in Budget 2011-12.

This is bad budgeting. Even as he announced the loan waiver, the Finance Minister should have made adequate provision for it in the Budget itself instead of leaving it to be covered by a Supplementary Budget.

Apart from the loan waiver, there are other items that require provision of funds in respect of off-budget liabilities. Also, the government is prepared to allot Rs.20,000 crore to meet the 40-per-cent increase in Central government salaries as recommended by the Sixth Pay Commission. It is well known that the government can readily raise enormous amounts of loan to balance Budget estimates.

The Union government has limitless discretion to borrow. Article 292 of the Constitution says: The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within the limits, if any, as may from time to time be fixed by Parliament and to giving of guarantees within such limits, if any, as may be fixed.

In the Constituent Assembly debate on August 10, 1949, on borrowing by the Union government under Draft Article 268, several members were against giving vast discretionary powers to the government in this regard. H.V. Kamath was more particular, saying: I therefore want that this Article should be so amended as to enable Parliament not merely to fix the limits of borrowing and the giving of guarantees, but also to see on every occasion that the purpose of the loan or the purpose of giving a guarantee is justified by the circumstances and that it is in absolute and complete consonance with the policy adopted by Parliament in our internal as well as international relations the more so in our foreign and international relations.

Dr. B.R. Ambedkar agreed with the members contention and said: for borrowing is an executive act in one aspect of the case, but in this Article, it is not proposed that the power of the executive to borrow is to be unfettered by any law that is to be made by Parliament. This Article specifically says that the borrowing power of the executive shall be subject to such limitations as Parliament may by law prescribe. Under this Article, I even concede that there might be an Annual Debt Act made by Parliament prescribing or limiting the power of the executive as to how much they can borrow within that year It seems to me that even that matter may be left to Parliament, because it will be for Parliament to say that borrowing shall not be done on the pledging of certain resources of the country We hope that Parliament will take this matter seriously and keep on enacting laws so as to limit the borrowing authority of the Union I go further and say that I not only hope but I expect that Parliament will discharge its duties under this Act.

So far, Parliament has not enacted any statutory measures as suggested by Ambedkar. Had Parliament established effective control by enacting a law on annual debt under Article 292 laying down the procedure for borrowing before passing the Budget, it might have made the government more conscious of the need to keep borrowings within reasonable limits and more accountable in utilising the borrowed fund in an efficient and economic way. In fact, the Comptroller and Auditor General (CAG) submitted a report in 1987 based on an in-depth study of the deficits and debts and pointed out the consequences of the financial mismanagement in disbursing the loans raised. Even then Parliament did not come forward to empower itself to control government borrowing.

At present, under the Fiscal Responsibility and Budget Management Act (FRBM), the government has been submitting statements to Parliament on its fiscal performance. But that is not enough. The FRBM Act, as enacted in 2003, provides that the Central government shall take appropriate measures to reduce fiscal deficit and revenue deficit so as to eliminate revenue deficit by March 31, 2008, and thereafter build up adequate revenue surplus.

In the Medium-term Fiscal Policy Statement submitted in 2007-08, the government set the revenue deficit targets at 2 per cent for 2006-07 (Revised Estimates); 1.5 per cent for 2007-08 (Budget Estimates); and zero for 2008-09. However, the statement submitted this year gives revised targets for revenue deficits: 1 per cent for 2008-09 Budget Estimate and 0 per cent for 2009-10. Thus the government has postponed the target of 0 per cent revenue deficit from 2008-09 to 2009-10 whereas the Act gives a mandatory direction to eliminate revenue deficit by March 31, 2008. It appears that the government has decided to fix fiscal deficit targets at its discretion.

Under the Financial Agreement Act, 1994, Australia established the Loan Council comprising representatives of the Federal and State governments. The Loan Council meets once a year to decide the borrowing requirements and allocations for the Federal and State governments for the forthcoming year. Under Section 8 of the United States Constitution, the Congress has the power to borrow money on the credit of the U.S. The Annual Budget set forth by the U.S. Congress includes, among other things, the power to decide on the appropriate level of public debt.

The Annual Budget comprises Revenue Budget and Capital Budget. The Revenue Budget consists of receipts of tax revenues and non-tax revenues and the expenditures on interest payments, administrative work, social and economic services, grants to States, expenditures of Union Territories without Legislatures and grants to foreign countries.

The Capital Budget consists of loans, borrowings, recoveries of loans, external assistance, disinvestment of public enterprises, and so on. Capital expenditure deals with all capital outlays in non-plan items, acquisition of assets, investments in shares and loans and advances to States and Union Territories, public undertakings and foreign governments.

The objective of a governments financial management should be to establish in the Revenue Budget a surplus, which should be used to create assets under the Capital Budget. However, the government may raise loans to finance the creation of a system of infrastructure and productive public enterprises, which will give reasonable returns annually, which would facilitate rapid economic development.

Until the mid-1970s, the Finance Ministers of free India maintained a revenue surplus, which assisted the Capital Budget. Afterwards, the government resorted to borrowings from the market and from the Reserve Bank of India (RBI) to cover current revenue deficits.

In 1980-81, the transfer from the Capital Budget to cover the revenue deficit was Rs.1715 crore, which was increased to Rs.15,859 crore in 1991-92. In his Budget speech for 1991-92, Finance Minister Manmohan Singh was concerned about this improper fiscal management and said: Indeed, we must make a conscious effort to reduce the internal debt of the government and the external debt of the nation so that we rely more and more on our own resources to finance the process of development. During the period of transition, it shall be our endeavour to minimise the burden of adjustment on the poor We must act fast and act boldly. If we do not introduce the needed correctives, the existing situation can only retard growth, induce recession and fuel inflation, which would hurt the economy further and impose a far greater burden on the poor.

With all his determination to act fast and boldly, Dr. Manmohan Singh could not control the revenue deficit; the Budget Estimate was Rs.13,854 crore and the Revised Estimate Rs.17,081 crore an increase of 23 per cent.

The prime objective of a parliamentary system is to ensure that the executive incurs no expense without the sanction of Parliament. The estimates of expenditures of different Ministries/Departments for the ensuing financial year are presented to Parliament in the form of Demands for Grants. If the Lok Sabha does not approve any grant as presented, it amounts to a loss of confidence of the House in the Cabinet, which should resign immediately. Such an exigency arises very rarely as the government is formed and exists on majority support in the Lok Sabha. After due consideration and adoption, grants are included in the Appropriation Bill which, when passed by Parliament, provides statutory sanction for the executive to withdraw amounts not exceeding the limit approved by Parliament.

However, there is a drawback here: charged expenditures are not put to vote in the Lok Sabha. According to Article 112, the following are the charged expenditures: (i) emoluments and allowances to the President, Chairman and Deputy Chairman of the Rajya Sabha, Speaker and Deputy Speaker of the Lok Sabha; (ii) debt charges of the Government, including interest, sinking fund, redemption and other relating charges; (iii) salaries, allowances and pensions of the Judges of the Supreme Court and the High Courts and of the Comptroller and Auditor General; (iv) any other expenditure to be charged under the Constitution and by law.

The Appropriation Bill includes the grants voted by the Lok Sabha and also the charged expenditures not voted by the House.

As voting by Parliament is not needed in passing the charged expenditures, there is a tendency on the part of the government to raise borrowing indiscriminately at its discretion, so much so that the proportion of charged items in the Budget has reached 81 per cent of the total disbursements.

Thus Parliament had control over only 19 per cent of the total disbursements in 2005-06 against 29 per cent 10 years earlier.

Further, the interest payment and repayment of debt form a very high percentage of the charged disbursements. For instance, in the total 2008-09 Budget Estimates, the charged expenditures in the Demands for Grant amounted to Rs.19,94,729 crore; of this, the allocations for charged disbursements of interest payments is Rs.2,07,465 crore and that of repayment of debt is Rs.17,45,574 crore. These heads form 98 per cent of the total charged expenditures.

Thus Parliament does not have effective financial control over 80 per cent of the total disbursements allocated in the Budget. Further, 98 per cent of the charged expenditures relate only to interest payments and the debt repayments.

Whether the announcement of the farm loan waiver of Rs.60,000 crore is an electoral strategy or not, it is not going to solve, even with proper distribution of the loan waiver amount, the problems of the agricultural sector and poverty-stricken farmers in general.

In 1950-51, the agricultural sector involving 70 per cent of the Indian population contributed 58 per cent of the gross domestic product (GDP). The Economic Survey of 2007-08 para 1.12 states: The secular decline in the share of agricultural sector in GDP continued with a decline from 24 per cent in 2001-02 to 17.5 per cent in 2007-08. It means that at present, 58 per cent of the people depending on the agricultural sector constitute less than 18 per cent of the GDP. This situation of declining income in the primary sector reveals the low income in farming resulting in chronic indebtedness and suicides of farmers.

In 1991-92, the P.V. Narasimha Rao government under the guidance of Finance Minister Manmohan Singh introduced the process of globalisation and free market economy. In his 1992-93 Budget speech, Manmohan Singh stated: We must begin a new chapter in our agricultural history where farm enterprises yield not only more food, but more productive jobs and higher income in rural areas. Under his guidance, five years as Finance Minister then and four years as Prime Minister now, productive capacity in farming and employment potential in rural areas have been on the decline.

In its report on Distressed Farmers of July 2007, the Working Group of the Reserve Bank of India stated: Mere macro-level decisions to inject higher doses of credit into the agricultural and rural sector will not improve incomes and living conditions of the marginal and small farmers and alleviate their poverty and distress. It is the equalisation of opportunities and access to education, health, life amenities and gainful employment opportunities that would take the significant portion of the society from the rural areas out of the quagmire of socio-economic inadequacies, wants and sufferings.

The government does not seem to have learnt from such lucid findings before taking the unilateral decision to stake Rs.60,000 crore, which may not solve the problems of farmers.

Unless Parliament acquires effective control over borrowings and effectively scrutinises the utilisation of the loans raised in the past, the present state of Parliament allowing 80 per cent of the grants without any voting will worsen in the years to come. Then the need for Parliament exercising control over the purse will become an absolute myth.