A four-year-old legislation restricting the Union government’s ability to spend beyond its means has not worked, a new study said.
Not only has the government succeeded in concealing the actual extent of expenditure by keeping big-ticket spending offbudget, the caps imposed on expenditure have also led to a cutback in spending on education and health, said a report prepared by the Centre for Budget and Governance Accountability (CBGA), a non-profit organization working to make the country’s budget-making process transparent.
As a result, the study has called for the scrapping of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The Act was passed to contain the government’s ability to run up deficits in its budget, which are inevitably financed by additions to the money supply—which in turn curbs the ability of the central bank to fight inflation and keep interest rates low.
Working on data released by the Controller General of Accounts, the report said while retail food price inflation rose from 2.4% in 2002-03 to 9% in 2006-07, interest payments on the Union government’s borrowings declined only marginally, from 4.7% of gross domestic product, or GDP, to 3.6% of GDP in the same period.
In contrast, the report argued, the Centre’s development expenditure, a total of Plan and non-Plan spending in education, health and other social sectors, has gone down from 7.5% of GDP to 6.3%.
“If the trend continues, despite the rise in tax revenues, the government will not be able to meet either the millennium development goals or its national common minimum programme commitments of raising health and education expenditure to 6% of the GDP,” said Praveen Jha, professor, Jawaharlal Nehru University, and a member of the governing board of CBGA.
The FRBM Act was passed at a time when the combined deficit of Union and state governments had touched 10%. It mandates that the Centre reduce its annual revenue deficit, or the excess of current spending over revenues, and fiscal deficit (or gross borrowings) to zero and 3% of GDP, respectively, by 2009. In 2007-08, a year before the deadline, the Centre expects to record a revenue deficit of 1.5% and fiscal deficit of 3.3%.
CBGA said just removing various direct tax exemptions would be enough to fund the deficits twice over. In 2006-07, tax revenues foregone due to exemptions were Rs2.89 trillion, or 7% of GDP, more than the combined fiscal deficit of Centre and states of Rs2.65 trillion.
The report also referred to the government’s use of off-budget transactions. Last fiscal, the Centre incurred an off-budget liability in excess of Rs24,120 crore through oil bonds to compensate state-owned petroleum firms for losses on sale of fuel at government-regulated prices. This year, it will add aroundRs23,000 crore to this bill.
Even while acknowledging that off-budget liabilities were increasing, Rajiv Kumar, director, Icrier, a think tank, said “it is still important to have the FRBM Act as a benchmark, a kind of a structural obligation, to rein in fiscal laxity by the government.”