Fiscal reform needs framework

An "institutional framework" is needed to sustain fiscal reforms without which a government cannot deliver and this framework or vehicle for reform is provided by Karnataka's public finance management and accountability system, deputy chief minister and finance minister Siddaramaiah said. He was launching a World Bank study on the subject.

Major fiscal decisions are not always taken within the framework of fiscal responsibility and so the state has equipped itself with a triumvirate of laws covering fiscal responsibility, capping government guarantees and transparency in procurement to create the institutional framework.

The result was that "Karnataka is on the threshold of fiscal correction as for the first time in eight years the state has presented a budget with a revenue surplus", he added.

Michael Carter, country director of the World Bank in India, commended Karnataka's progress in fiscal reform and noted that it was the first major state to almost show revenue balance and the first to pass the Fiscal Responsibility Act. But he warned that the state of the power sector can "undo the fiscal gains".

He also noted that the state had some way to go on the human development front, particularly in comparison to neighbouring Tamil Nadu.

Stephen Howes, lead economist of the bank in India and one of the authors of the report, emphasised that developing countries had to maximise the efficiency of government spending as they had far fewer resources than rich countries where the unmet basic needs of people were fewer.

The report has made several recommendations, but of them there were three key ones. First, budgeting should be realistic and new initiatives of the state government should be restricted to the budget.

Second, financial controls should be rebalanced, there being a need for fewer micro controls and more careful scrutiny of capital projects and power subsidy obligations.

Third, the state's auditing and accounting framework should be fully implemented. In particular, all agencies which receive government funds like local bodies should maintain accounts and have them audited.

Gurucharan, secretary-finance of Karnataka, said that the primary vehicle of fiscal reform in the state has been the rolling medium term fiscal plan with which the annual budget had been dovetailed. Four of these had been presented so far. Twenty two departments had so far prepared their fiscal plans and this will be extended to all the 60-odd state government departments.

Among the achievements, he said fiscal marksmanship, the extent to which budget estimates turn out to be close to revised estimates, had gone up from 92 per cent to 96 per cent and this year would probably reach 100 per cent.

As a result of the fiscal correction and small revenue surplus likely to be achieved, this year the government may not have to resort to any budget cuts further down the road.

Striking a note of caution in the general self-congratulatory atmosphere, chief secretary K K Misra said most of the adjustments made till now were in the nature of turning off the tap.

But basic reform was not just a matter of managing the cash flows but knowing the stream of future liabilities by preparing financial statements on an accrual basis.