Look beyond fiscal control law: Experts

Call for bringing off-Budget liabilities into the Budget calculations.

Even as the debate over off-Budget liabilities continues, former finance ministry bureaucrats and leading economists say it's time the government went beyond the targets in the Fiscal Responsibility and Budget Management (FRBM) Act.

They have also called for bringing the off-Budget liabilities into the Budget calculations and curbing the combined state and central fiscal deficit to 3 per cent of gross domestic product (GDP).

The FRBM Act stipulates that the Centre's fiscal deficit be contained to less than 3 per cent of GDP by the end of 2008-09 and the revenue deficit to zero.

Given the progress so far (the government has targeted a fiscal deficit of 3.3 per cent of GDP and a revenue deficit at 1.5 per cent of GDP for 2007-08), experts say future public finance policy framework should not deviate from these targets.

Former finance secretary Ashok Jha said it was time the government looked at reducing the combined fiscal deficit of states and the Centre, which is around 6 per cent of GDP, to an "ideal level of 3 per cent within a finite time frame".

The combined gross fiscal deficit of the Centre and states is expected to decline to 5.6 per cent of GDP in 2007-08, down from 6.4 per cent in 2006-07.

"Once you reach the target, the idea is not to regress. The Act does not stop the government from bringing down the fiscal deficit below 3 per cent of GDP," he said.

On off-Budget liabilities, Jha said this accounting procedure was not something the UPA government had discovered.

These liabilities, which the Prime Minister's Economic Advisory Council had in July pegged at around 2 per cent of GDP, are cause for worry. In January, the council said the liabilities might be higher than previously assumed given rising oil, fertiliser and food prices.

"The FRBM Act requires all expenditure and receipts to be included in the Budget calculation. The oil and fertiliser bonds camouflage the budgetary deficit and make a mockery of the FRBM. They should be brought under the Budget calculations," said EAS Sarma, former economic affairs secretary.

Rajiv Kumar, director, Indian Council for Research on International Economic Relations, agrees. "This is subterfuge. The government must include off-Budget items in the Budget calculation," he said.

Under an amendment to the FRBM Act, from 2008-2009, the government is allowed to issue bonds within limits, but only to finance capital expenditure. Using debt to finance recurring (revenue) expenditure would not be allowed.

The Planning Commission has for some time now been saying that sticking to the targets of the FRBM Act will curtail the government's ability to increase social sector spending. Economists say reducing the revenue deficit by 1.5 per cent of GDP within 2008-09 is an uphill task.

"Though the government is expected to achieve the fiscal deficit target, it will be difficult to achieve the revenue deficit target," said Soumitra Chowdhury, chief economist, ICRA. He added that containing the fiscal deficit at 3 per cent of GDP was sustainable in the long run.

However, a section of opinion feels that the coming months are going to test the governments' ability to sustain fiscal prudence.

"Both the Centre and states will soon have to shoulder the burden of the pay hikes to be recommended by the Sixth Pay Commission without the prospect of any matching expenditure reform. To compound these concerns, the government in general will soon be sucked into the fiscal vortex of the coming elections with competing populist announcements. To what extent the government will uphold the FRBM spirit is anybody's guess," Sarma said.