Errant children need to be disciplined by strict rules rather than by persuasion.
This rather commonplace parental strategy is also valid when it comes to chronically profligate creatures such as the Indian government.
Politicians with short time horizons have many reasons to buy votes and little reason to bother about the solvency of the Indian state. That is the way their incentives are structured. Hard fiscal rules backed by legislation is one solution.
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The report of the 13th Finance Commission that was made public on Thursday tries to outline new public finance targets that will hopefully be the basis for new legislation on fiscal discipline. Such legislation will build on the landmark Fiscal Responsibility and Budget Management Act 2003 (FRBMA) that did a lot to repair India’s tattered public finances and which almost got public finances back on track, till budgetary fudging of various subsidies and then the sharp economic downturn sent them off the rails once again. India now needs a new FRBM.
The TFC report was released a day before finance minister Pranab Mukherjee announces the new Union Budget. He is likely to announce that he has managed to not overshoot the fiscal deficit target he set for himself in July, a remarkable feat that was pulled off in all likelihood because economic growth rebounded smartly and spending did not overshoot targets.
Illustration: Jayachandran / Mint
But the fiscal deficit is still too high for comfort, and can crowd out private investment once companies seek funds to expand production capacity. High public debt means that the government has to keep aside a fat slice of its revenue to pay interest rather than spending on key areas such as health, education and infrastructure. India is nowhere close to the sort of fiscal crisis that some European nations such as Greece and Spain are, but the recent convulsions in these countries should serve as a useful reminder that there are limits to deficit financing.
There are two other laudatory suggestions by TFC. One, it recommends huge privatizations over the next five years to help the government get its finances in order. Two, it creates fiscal space for lower levels of government—the states, urban bodies and panchayats —that will strengthen federalism in India.
A dynamic and globalized Indian economy needs a new fiscal architecture to ensure that economic growth stays close to double digits in the years ahead. TFC offers a good framework for such architecture.
Will the Union Government heed TFCs suggestions on fiscal consolidation? Tell us at email@example.com