New Delhi: In the course of his budget speect finance minister P. Chidambaram buried a landmark legislation meant to make governments live within their means. A key target in the Fiscal Responsibility and Budget Management (FRBM) Act will not be met in 2008-09 because the government wants to meet its social sector objectives, he said.
Soon after, Chidambaram said the government would take, in Budget 2008, its first steps towards disclosing its liabilities in a more transparent way and also look at a new roadmap to revive FRBM. FRBM was legislated in 2003 to enforce fiscal discipline, make liabilities transparent and avoid transferring bills for current expenses to the next generation.
Revenue deficit, the excess of current expenditure over current receipts, was to have been brought down to zero by 31 March 2009 according to FRBM. This will not be done in 2008-09, but the year after that, the minister said. The current government’s term is scheduled to end next year.
Not on target: Finance minister P. Chidambaram (centre) said the government would need one more year to wipe out revenue deficit. (Raveendran / AFP)
At a post-budget press conference, Chidambaram, in reply to a question on missing the FRBM target, said: “I am sure the second edition of the UPA (United Progressive Alliance) government will eliminate it in 2009-10.”
FRBM does allow governments to miss targets in the event of exceptional circumstances. FRBM’s targets are considered critical as unchecked deficits pose a macroeconomic risk. Since government borrowings mostly mean adding money supply to the system, it could stoke inflationary pressures.
The Budget speech acknowledged that a significant amount of liabilities on account of oil, fertilizer and food bonds are currently “below the line”. Consequently, the fiscal and revenue deficits are understated to the extent and it is essential to bring them into the government’s fiscal accounting, Chidambaram said.
The government plans to give FRBM one more go, but through a new roadmap. The 13th finance commission will be asked to revisit the existing roadmap for fiscal adjustment and suggest a suitably revised one, Chidambaram said.
Currently, some aspects of FRBM are shrouded in controversy. Expenses of the government such as on oil bonds, which are issued to public sector oil companies to make up for their losses arising from selling petroleum products below cost, are not included in the government’s calculation of revenue and fiscal deficits.
The Comptroller and Auditor General of India (CAG), the external auditor of government accounts, has pointed out that these items should be included in calculating the deficit. Consequently, CAG’s figures for deficits exceed those of the government.
Other than oil bonds, which have been taken off the balance sheet for a while in calculating the deficits, the Budget proposals for 2008-09 include a Rs60,000 crore write off of farms loans by 30 June 2008. Banks, cooperatives and regional rural banks, will write off the loans on their books, while the government will provide “liquidity” to the system to offset the write offs.
“We will provide over three years’ liquidity to the banking system equivalent to the amount that is being written off,” said Chidambaram.The budget proposals do not make provisions for the liquidity support the government is to provide the banking system though finance ministry officials, who did not want to be identified, said it could be in the form of bonds.
The consequence of missing targets could be negative across the board. FRBM played an important role in nudging international credit rating agencies to upgrade India’s sovereign ratings, which translated into lower interest rates for Indian companies’ overseas borrowings, a former finance ministry official, who was closely associated with drafting the FRBM Act, said.