Paper exercise

Paper exercise

On the face of it, the impression given by the mid-year review under the Fiscal Responsibility and Budget Management (FRBM) Act would be something like this: There have been expenditure slippages, but revenue is buoyant and things are under control. Money inflows are a matter of concern, but we’re on the job. Inflation has been controlled. But that’s a partial truth at best. The review elides more than it reveals.

Consider the revenue and expenditure disclosures that are mandatory under the FRBM Act. Total non-debt receipts stand at 44.8%, while the FRBM norm is not less than 40%. Similarly, revenue deficit should be no more than 45% of the Budget estimates for the year in question. They stand at 85.5%. That’s hardly comfortable.

In case of non-debt receipts, if one excludes the receipts from the sale of State Bank of India stake, the figure falls to 41% of the Budget estimates, not far from the FRBM benchmark of 40%. There are, however, other problems than this sort of nit-picking. The use of creative accounting to keep oil-bonds off balance sheet to present a manageable, if not rosy, picture is one example.

Since fiscal year 2005-06, the government has been issuing oil bonds to oil companies. Prudence would demand that these bonds be accounted in their years of issue. They are not. In fact they have been the source of divergence between what is said in the Budget at a glance and what is finally recorded in finance accounts. In 2005-06, a gap of Rs18,492 crore in fiscal deficit was accounted by the fact that government issued oil bonds worth Rs17,263 crore that year. In 2006-07 the government issued Rs24,121 crore woth of bonds. This year, another Rs23,457 crore will be added to the bond stock. In the end, it’s left to the comptroller and auditor general to clear up the mess.

Against this backdrop, the usual, official, claim that expenditure is “frontloaded" while receipts are “backloaded" is devoid of explanatory power. If revenue deficit already stands at 85.5% of the Budget estimates, it would be unsurprising if it exceeds these estimates.

That defeats the very purpose of having the FRBM Act. If it’s up to auditors to clarify the picture, why have a charade of laying such meaningless statements in Parliament? Meeting the FRBM targets is important not only because they provide signals to players in the economy, but for inflation management as well. Tighter fiscal policy is a must to complement monetary efforts in this regard.

Playing with figures is one issue, but lack of vision and priority in expenditure is an even more serious issue. As an example, consider one minor detail. In an inflationary age, one would expect an interventionist government to spend more on food and public distribution. Yet, in the first six months, only 56% of the budgeted Rs26,406 crore was spent.

On the other hand, the government had no compunction in spending a massive Rs7,764 crore on the National Rural Employment Guarantee Scheme (NREGS). The fact that NREGS money creates demand for goods supplied by the public distribution system probably escaped the Union government.

Economists have known for some time now that treating government as an exogenous player in the economy game does not explain much. If the FRBM Act exists, it requires officials, elected or otherwise, to implement it. The benevolent view of the government assumes that these officials will implement the law in letter and spirit. That would be so if these officials did not have preferences and incentives of their own about the law. That’s not true. These officials have one big preference, mostly ignored by analysts. It’s called surviving in politics. That, in the Indian context, is the grave of all laws.

Can the FRBM targets be achieved in a populist environment? Write to us at