Needed: credible fiscal rules

Needed: credible fiscal rules
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First Published: Tue, Jul 07 2009. 10 31 PM IST
Updated: Tue, Jul 07 2009. 10 31 PM IST
The Union Budget unveiled on Monday has split opinion as few others have in recent years. But just about everybody agrees that the United Progressive Alliance (UPA) government has taken a huge risk by expanding the gap between revenues and spending to levels not seen since at least 1993. The fiscal deficit for 2009-10 has climbed to an estimated 6.8% of the country’s gross domestic product.
This wide fiscal gap has rattled the money market as well as most economists.
Finance minister Pranab Mukherjee has said in several post-Budget interviews that he will try to cut the fiscal deficit and bring it back into safe territory over the next three years, although it puzzles us why he did not forcefully say this during his Budget speech to calm frayed nerves in the market. The 13th Finance Commission, too, is expected to draw a road map towards fiscal correction before the end of the year.
A common refrain is that the Budget slipped deeper into the red only because of the economic slowdown. But that is not borne out by facts. Irresponsible budgeting started long before the global economic crisis hit India after September. The targets set by the Fiscal Responsibility and Budget Management (FRBM) Act was torn to shreds when P. Chidambaram was finance minister, in the dying moments of India’s unprecedented economic boom. India now needs a new version of that piece of legislation. Just vague talk about a fiscal exit strategy is not credible enough, given the way policy is made in India.
The haste with which the Act was put aside suggests that the political establishment has few incentives to run a conservative macroeconomic policy. Strong tax revenues during a boom create pressures to fund vote-grabbing programmes such as the farm loan waiver, while downturns bring pressure from powerful business lobbies for tax cuts and bailouts.
Fiscal policy will and should always have an element of discretion. Yet, despite the recent experience with the Act, there is a need to set new fiscal rules that force governments to minimize deficits over an economic cycle.
“Hard budget constraints” are surely needed to discipline a profligate political class.
Does India need tight fiscal rules? Tell us at views@livemint.com
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First Published: Tue, Jul 07 2009. 10 31 PM IST