FISCAL CONSOLIDATION IN INDIA

http://economictimes.indiatimes.com/news/economy/finance/rbi-governor-raghuram-rajan-warns-against-fiscal-deficit-driven-growth/articleshow/50779498.cms

http://economictimes.indiatimes.com/news/economy/indicators/india-faces-challenges-in-sticking-to-fiscal-roadmap-sp/articleshow/50792487.cms

FISCAL CONSOLIDATION IN INDIA

The average combined fiscal deficits, of Centre and states after 1975, had been above 10 per cent of

the GDP till 2000–01. More than half of it had been due to huge revenue deficits. The government

were cautioned by the RBI, the Planning Commission as well as by the IMF and the WB about the

unsustainability of the fiscal deficits. It was at the behest of the IMF that India started the politically

and socially painful process of fiscal reforms, a step towards fiscal consolidation.50 A number of

steps were taken by the government at the centre in this direction and there had been incessant

attempts to do the same in the states’ public finances too. Major highlights in this direction can be

summed up as given below:

1. Policy initiatives towards cutting revenue deficits:

(i) Cutting down expenditure—

(a) Cutting down the burden of salaries, pensions and the PFs (down-sizing/right-sizing of

the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension

reforms-PFRDA, etc.);

(b) Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilisers,

sugar, drugs to be rationalised, it was done with mixed successes);

(c) Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment

of external debts, debt swaps, promoting external lending, minimal dependence on

costlier external borrowings, etc.);

(d) Defence being one major item of the expenditure bilateral negotiations initiated with

China and Pakistan (the historical and psychological enemies against whom the Indian

defence preparedness was directed to, as supposed) so that the defence force cut could

be completed on the borders, etc;

(e) Budgetary supports to the loss-making PSUs to be an exception than a rule;

(f) Expenditure reform started by the governments in different areas and departments;

(g) General Services to be motivated towards profit with subsidised services to the needy

only (railways, power, water, etc.);

(h) Postal deficits to be checked by involving the post offices in other areas of profit;

(i) Higher education declared as non-priority sector; fees of institutions of professional

courses revised upward; etc.

(ii) Increasing revenue receipts:

(a) Tax reforms initiated (Cenvat, VAT, Service Tax, GST proposed, etc.);

(b) The PSUs to be disinvested and even privatised (if a political concensus reached which

alludes today);

(c) Surplus forex reserves to be used in external lending and purchasing foreign high quality

sovereign bonds, etc.

(d) State governments allowed to go for market borrowing for their plan expenditure, etc.

2. The borrowing programme of the government—

(i) T he Ways and Means Advances (WMA) scheme commenced in 1997 under which the

government commits to the RBI about amount of money it will give as part of its marketborrowing

programme, to bring the transparency in public expenditure and to put a political

responsibility on the government.

(ii) The RBI will not be primary subscriber to government securities in the future—committed

way back in 1997.

3. The fiscal responsibility on the governments:

(i) The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 (voted

by all political parties) which puts constitutional obligation on the government to commit so

many things as fiscal responsibility comes in the public finance—fixing annual targets to cut

revenue and fiscal deficits; the government not to borrow from the RBI except by the WMA;

government to bring in greater transparency in fiscal operations; along with the Budget the

government to lay statements regarding fiscal policy strategy in the House and Quarterly

Review of trends of receipts and expenditures of the government.

(ii) A mechanism (to include state governments under the umbrella of fiscal responsibility) was

advised (now implemented, too) by the 12th Finance Commission which allows the state

governments to go for market borrowing (without central permission) for their need of plan

development provided they pass their fiscal responsibility acts (FRAs) and commit to the

fiscal responsibility regarding cutting their revenue and fiscal deficits. As many as 19 states

have already passed their FRAs by now.

At present, we cannot conclude that once the FRBM Act is passed the fiscal abberations will be

automatically checked. At the same time, we cannot say whether it will hamper the social cause. But

experts agree upon that at least a legislative beginning has taken place and the opposition in the House

must have got a tool (and so the people) to create