The finance ministry has substantially diluted the Fiscal Responsibility Bill which "" once gets the status of an Act "" is set to ensure financial prudence at both the Centre as well as state governments.
It has watered down the fiscal accountability of the Centre and taken the sting out of the Reserve Bank of India as the penal provisions "" proposed to be imposed on the government in case of fiscal indiscipline "" have been dropped.
The Bill, slated to be passed by Parliament this month, was not introduced during the Monsoon Session.
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According to sources close to the North Block, the proposition that fiscal deficit will be progressively reduced in a graded way over a period of next few years has been dropped from the bill. In effect, the proposed Fiscal Responsibility Act will not ensure any commitment on the part of the government to pare fiscal deficit over the years.
The provision for penalty to be imposed by RBI on the government in case it has failed to restrict the fiscal deficit has also been removed. The draft bill had the provision of the RBI pruning the size of the government borrowing in case the government is not able to keep the fiscal deficit in check.
The Fiscal Responsibility Act will also not hold the finance minister responsible for the fiscal plan presented to Parliament even though the draft bill had this provision. "Under the Constitution, the ministers cannot be held accountable for the statements they make and hence the idea of making the finance minister responsible for the fiscal plan has been dropped," said sources.
The proposed changes in the accounting norms have also been dropped as the Comptroller & Auditor General has reportedly expressed its inability to change the accounting practices unless sufficient time is given, sources said.
"The Bill is a much watered down version of the draft. It is unlikely to enforce responsibility on the government on the fiscal front. It has also taken away the sting from the Reserve Bank as it will not be able to penalise the government for fiscal irresponsibility," sources pointed out.
The dilution of the proposed act is significant as the RBI has been making a strong pitch for the fiscal responsibility legislation to bring in fiscal discipline at the central and state government finances. "... for it to be credible it should include stringent requirements for fiscal transparency, backed by strong enforcement mechanisms. The legislation should explicitly focus on the elimination of dissavings of the public sector, placing statutory limits on borrowings and stabilisation of the debt/GDP ratio at a sustainable level," the latest annual report of the central bank said.
The objectives of the proposed legislation were to ensure macro stability, fiscal sustainablity and solvency, elimination of deficit bias, fiscal transparency, fiscal accountability including penal actions and autonomy of monetary policy including limits on access of government to central bank credit.