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Business News/ Opinion / Online-views/  Tell it like it is
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Tell it like it is

Failed fiscal plumbing is not party-specific. It has happened with all political regimes.

Photo: Sushil Kumar/Hindustan TimesPremium
Photo: Sushil Kumar/Hindustan Times

Fiscal responsibility legislation requires that targeted deficits be met without delay, deferral or denial of committed expenditures.

The Union Budget this year is being watched keenly. Will the government stick to the fiscal target of 3.9% of gross domestic product (GDP) for the current year? Will it stay with 3.5% for next year? Rating agencies have joined those who believe the targets can be crossed with no adverse consequences. Ranged against them are those who want the limits adhered to, no matter what.

Neither side seems to be interested in the fiscal insides of that final deficit number. What went into the brew? Or rather, what was illegitimately thrown out of the brew to make it seem like the target was met?

What the forthcoming Union Budget needs to demonstrate most of all is fiscal responsibility, the first two words of the legislation that requires pre-announced deficit targets. It was never the intention of fiscal responsibility legislation that announced targets be met irresponsibly. The first and most critical task of a government bound by such a law is that all expenditure commitments be met in full. Arrears from unmet commitments have to be accounted for too. If the finance minister were to stand up in Parliament on Budget day, and declare that the actual fiscal deficit for the current year is likely to be closer to 4.1% (or whatever) than to 3.9% after meeting all expenditure commitments in full, I for one would stand up and applaud.

The Centre is not the only level of government where fiscal flows are blocked. Municipal employees in Delhi did not receive their salaries for several months. Whether the blockage lay in the flow going to the Delhi government’s department of Urban Local Bodies, or from it to the several municipal corporations of Delhi, was not clear. Like many things in India, what should be a plain and simple fact becomes fodder for allegations.

At the Centre, several scholarship and fellowship schemes run by the University Grants Commission (UGC), the Indian Council of Medical Research (ICMR), the Council for Scientific and Industrial Research, the Department of Science and Technology, and the Department of Biotechnology, have run dry. Research grants, scholarships, and stipend commitments stand violated. I do not have access to the macro magnitudes involved. The Controller General of Accounts records only what is paid, not what was due and not paid (since we do not have accrual accounting). Unpaid interest on internal or external public debt is called a default. But these failed promises are defaults too, only they don’t carry the same headline consequences.

Until events like the municipal strike in Delhi. Temporarily suspended for Republic Day, the strike was back in indefinite mode starting the next day, encompassing sanitation, engineering, administration, health—all departments essential to keep the city going. It finally ended on 11 February with the promise that salaries would be paid. Union unrest in the world involves demands for salary increases or bonuses or financial enhancements. Here in Delhi was a unique instance of workers stopping work because they were not getting paid for that work. There should have been a budget line for those salaries. And the flow should have followed the contours of budget lines. Where and when did the funds get blocked?

Failed fiscal plumbing is not party-specific. It has happened with all political regimes. It is a routine non-transparent way by which governments cope with the watch on announced deficit targets of fiscal responsibility legislation.

Unfortunately, every such instance is given a political colour, which then pushes back further the prospect of a systemic solution. In the Delhi municipal case too, the unions on strike called for restoring the system previously in place, when fiscal flows went directly from the office of the Lieutenant Governor of Delhi to what was then a single municipal corporation. This makes it seem like political warfare, when in a fundamental sense, it is not. If politics can interfere with budgetary pathways, the fault lies with the pathways. If they are robust, even a politician who tries to interfere can never succeed.

What is needed at this hour is not to roll back the decentralization of the municipal corporation into regional units (since there have all along been other separate municipal corporations in Delhi anyway, one for Lutyens Delhi and one for the Cantonment), but simply to de-block the fiscal pipes in place for fund flow. A larger systemic correction is needed, of course, for the horrendous complications in the governance of Delhi.

Another headline event which owed its genesis at least in part to failed fiscal commitments, was the recent tragic suicide of a student of Hyderabad Central University. In his suicide note, he mentions scholarship arrears amounting to 1.75 lakh. The arrear build-up covers a long period, pre-dating the event that led to his suspension. It was just a system failure, pure and simple. And he was by no means the only student so affected. There were thousands affected by the cessation of Central scholarships, and perhaps many more affected by blocked scholarships from state governments. There are pensioners who don’t receive what for them is survival money. Wage payments under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) are delayed. The fiscal flow problem has become a nation-wide disease.

An advisory is reported to have been issued by the UGC asking universities to set up student counselling systems for redressal of problems faced by them. But no counselling can provide redressal for failure of scholarship and salary flows. That can only happen when the scholarships, already awarded and committed to, start to flow again. No one is asking for fresh commitments that cannot be honoured.

A failed scholarship flow to a student does even more damage than the immediate financial distress, which is bad enough. It is far worse than if that scholarship had never been awarded in the first place. The experience of failed expectations sows distrust in the hearts of the young towards government. Is this how we want to prepare them for their lives as adult citizens?

The ICMR is one of many science departments that have had deep cuts in fund flow from the Centre. When that happens, something has to give. Either salaries have to remain unpaid, or grants previously sanctioned have to be truncated, meaning that equipment already installed with the first tranche of a grant cannot be used, or that research results cannot be tested for robustness, or that a promising cure for a disease cannot be further pursued. If the intent was to have the ICMR network find private funding for research, that intent cannot be imposed on them cold turkey. The phase-out of public funding has to be negotiated over an adjustment period of at least three years.

Even statutory grants going from the Centre to states, which are constitutionally under-written after Finance Commission recommendations are accepted in Parliament, can be undermined by failure to flow in practice. The device through which this is achieved, in the case of grants, is the utilization certificate. The disbursing end just has to find fault with the certificate provided, pointing out real and imaginary shortcomings, until the applicant gives up.

The grant for local governments prescribed by the Thirteenth Finance Commission, for the period 2010-15, did not flow as prescribed, as I discovered in an investigation I did with Manish Gupta of the National Institute of Public Finance and Policy. Two-thirds of that grant was totally unconditional, designed to flow without hindrance, so that municipalities and panchayats could count on it and commit to a certain level of local service provision—sanitation, garbage disposal, street lighting. In practice, there were shortfalls in releases relative to allocations, peaking in the years 2011-12 and 2012-13. These were years of acute fiscal distress at the Centre (when rating agencies threatened a downgrade). Worse still, the shortfalls did not apply uniformly across states. Five states managed to receive their allocations in full, for both rural and urban local bodies, every single year. Other states failed variously, some getting nothing at all in one or more years. Some were compensated in the last year, 2014-15, but many were not. And no, the five states were not all aligned with the ruling dispensation at the Centre. The blockage was just the bureaucratic response to the fiscal stress of the time. Successful states were simply those whose bureaucratic machinery had mastered over time the fine art of overpowering utilization certificate obstacles at the Centre.

To repeat, fiscal blockages are not a political issue. They are a structural issue. A finance minister should not ordinarily have to worry about unpaid commitments, because the system should never have built them up in the first place. What we look to the finance minister for in his budget statement is a commitment to fiscal responsibility by making provision for unpaid commitments in current and past years. We need a fiscal system at every level that tells it like it is.

Indira Rajaraman is an economist.

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Published: 16 Feb 2016, 12:02 AM IST
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