Plan panel wants FinMin to junk FRBM target

Says tight norms may limit government's ability to fund flagship schemes.

The Planning Commission, in its 11th Plan (2007-12) draft, has advocated side-stepping the zero-revenue deficit target by 2009 that is mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. In the process, it has engaged itself in a straight battle with the finance ministry.

The 11th Plan draft document, which was recently cleared by the full Planning Commission, held that maintaining zero-revenue deficit would substantially limit the government's ability to fund flagship schemes. It also stated that the fiscal deficit should be the single monitor of the central government's fiscal discipline.

Finance Minister P Chidambaram has made it clear that the government is bound by the FRBM Act, 2003, which mandates it to cut the revenue deficit by a minimum of 0.5 percentage points every year.

In 2006-07, the Centre's revenue deficit stood at 2 per cent of the gross domestic product. The government has to eliminate this by March 2009.

Chidambaram, answering a question at the Economic Editors' Conference recently, said he was aware of the Planning Commission's view, but pointed out: "I cannot violate the FRBM Act. I am bound to obey it."

Analysts feel the government must stick to its deficit targets. "A zero-revenue deficit can curb expenditure on health and education, which creates human capital. However, from the point of view of fiscal discipline and productivity of government expenditure, achieving and maintaining zero-revenue deficit is necessary," said economist Govinda Rao, director, NIPFP.

Senior finance ministry officials agree the Act can pose a problem in the future. "As revenue collections are buoyant, we expect it will be sufficient to meet the needs of the social sector," said a senior official, adding that no country keeps a close watch on its revenue deficit.

Revenue deficit is the difference between revenue expenditure and revenue receipts. The Prime Minister's Economic Advisory Council, in its economic outlook for 2007-08, has said the central government's revenue deficit is unlikely to be eliminated by 2008-09 because of the forthcoming Sixth Pay Commission's report and other unforeseens.