New fiscal dharma and a rules-based society
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Last week the report of the panel to rework the Fiscal Responsibility and Budget Management (FRBM) Act was made public by the government. Reacting on the report seeking a radical makeover of the fiscal rules governing the country, the panel’s chairman N.K. Singh, former MP and revenue and expenditure secretary, told Mint this augurs a paradigm shift: “The report needs to be seen as the broad architecture to move the country towards a new fiscal era.”
Singh is right.
But the thing is that it has taken the country three decades to implement what is common sense—exercising rectitude in spending public money—and something that was formally proposed 32 years ago in the Long Term Fiscal Policy (the then finance minister was V.P. Singh and a key co-author was Bimal Jalan, former RBI governor) submitted to Parliament.
Perhaps the apparent reluctance of so many governments since then to adhere to fiscal dharma exactly captures the importance of the Singh committee’s recommendations. It needs to be embraced in earnest and as soon as possible.
What is new in the fiscal rules proposed for the country? And why is it important?
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For one, the new anchor is debt and not the fiscal deficit. The latter is gross borrowings and the former is the summation of domestic and external public debt. At present the ratio of India’s debt to gross domestic product (GDP) is estimated at a staggering 70%—among the worst among other comparable economies. The plan is to bring this down to 60%. Accordingly the proposal is now to repeal the FRBM Act and explicitly acknowledge the new fiscal metric, debt, by rephrasing the new law as the Debt and Fiscal Responsibility Act.
Second, the panel has dispensed with the idea of a band for the new metric. Going by the recent fiscal profligacy record of governments this is a smart move as there would always be a natural preference for the upper band. Instead, the panel has proposed specific escape clauses, recognizing that some unforeseen circumstances can upstage even the best laid fiscal plans.
Third, the panel has recommended the administration of the new fiscal rules be vested with a new body manned by experts: Fiscal Council. Again, a good move. Because right now the finance ministry is the judge and the jury and that is never a good idea.
And now to turn to why we should care about whether we have fiscal rules.
Just remember that for most of the seven decades of modern, independent India we have stuck to an exceptions-based regime—the outcome is obvious; crony capitalism and corruption are just two examples. Not only does a rules-based regime favour meritocracy it establishes an audit trail and consequently brings transparency to spending of public money—and this is important not just to international rating agencies but also to citizens of India. Especially since the finances of states, under pressure for a host of reasons, is steadily sliding into dangerous territory. Absence of a law will only advance this crisis, and the consequences from previous fiscal mishaps are all too fresh in our minds.
In the last few years there has been a pointed effort to adopt a rules-based regime—linking Aadhaar to avail of government benefits (more recently with an individual’s PAN) being one example. But the best signal would be if the government—union and states—commit to a rules-based regime on spending of public money.
It is then clear that the country needs a new fiscal framework. We can rue the fact that it should have happened sooner. But as the cliché goes: Better late than never.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.
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