Finance minister Pranab Mukherjee will have a lot on his plate right now—pressure from party bosses, demands from business lobbies and the unrealistic expectations of the financial markets. He is, thus, unlikely to have time to take more challenges on board.
Illustration: Jayachandran / Mint
But the finance minister should realize that it is time to overhaul the way the gap in government finances is reported each year. There has been too much fudging in recent years, as the previous United Progressive Alliance government struggled to prove to the nation that it had public finances under control.
The main metric that is reported these days is the gross fiscal deficit, the difference between the government’s total expenditure and total revenues. Economists and bond traders closely watch the fiscal deficit, because it gives them a sense of how much the government needs to borrow to bridge the gap between revenues and spending. The bond markets are jittery right now because the huge anticipated rise in government borrowings could push up interest rates and push down bond prices.
The fiscal deficit is a relatively new feature of Indian budget making. Till around two decades ago, finance ministers only reported the budget deficit, which was nothing but the amount that the Reserve Bank of India (RBI) lent to the government. It was only in the post-reforms era that other types of market borrowings were taken into consideration through the concept of fiscal deficit.
Now is the time for another advance. Mukherjee should tell the nation even more about the true state of public finances. The first step is to also report the total public sector borrowing requirement (PSBR) that will take into account not just the usual borrowings, but also bonds issued off balance sheet to the oil and fertilizer firms and Food Corporation of India.
That should give us a far better idea of the hole in government finances and its effects on the private sector.
The voluminous report by the committee headed by Rakesh Mohan, former RBI deputy governor, to assess India’s financial sector has made many good recommendations on how the government budget can be made more transparent. Many of these recommendations will take time to implement.
But a move from reporting the fiscal deficit to reporting the PSBR is a task that can be done quite quickly. Mukherjee should either make the transition this year or announce plans to do so next year.
The Union budget can do with less fudging.
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