FRA to cap fiscal deficit

FRA to cap fiscal deficit
ENS ECONOMIC BUREAU

NEW DELHI, JULY 15: The proposed Fiscal Responsibility Act will endeavour to cap the fiscal and revenue deficit in a bid to bring them down to a desired level in the medium term.

The proposal forms part of the draft report which has been prepared by EAS Sarma, secretary, department of economic affairs, and submitted to Finance Minister Yashwant Sinha for further action.

According to sources, the Act will specify the time-frame for a reduction of the fiscal and revenue deficits, which may range from three to five years. The effort to contain the fiscal and revenue deficits, however, will be based on certain underlying assumptions. In the event of any untoward happenings, the targets could be debated and reviewed by Parliament.

Sources added that in certain countries deviations from targets are subject to judicial review. It was pointed out that unanticipated expenditures on events like drought, war, etc. might render the targets meaningless. However, it was stressed that these underlying assumptions needed to be defined properly so as to impose greater fiscal discipline on government.

In the case of India, the appropriate forum for permitting a deviation in fiscal targets would be Parliament. The system of Parliament scrutiny is likely to be an important part of the Fiscal Responsibility Act.

The other important feature of the Act would be complete transparency in the budget-making exercise. Sources explained that the whole exercise would lose its meaning if the figures dished out by the government were suspect.

The initial report on the proposed Act was prepared by Sarma in pursuance of the announcement made by Finance Minister Sinha in his budget speech. Emphasising the need for containing the fiscal deficit, Sinha had proposed that a strong institutional mechanism be put in place to check the growing menace of deficit.

During the last five years, the fiscal deficit has grown from 4.0 per cent of GDP in 1996-97 to 5.6 per cent during 1999-2000. In absolute terms, the fiscal deficit, which was Rs 56,242 crore in 1996-97, swelled to Rs 1,08,898 crore in 1999-2000, and is expected to rise further to Rs 1,11,275 crore during the current financial year.

The rising fiscal deficit has considerably added to the interest burden of the government. The gravity of the situation becomes manifest from the fact that during 2000-01 interest payments have been pegged at Rs 1,01,266 crore, which would be much more than the Plan expenditure amounting to Rs 88,100 crore. Fiscal discipline, sources said, was necessary to avert a debt crisis.

The revenue deficit has gone up from 2.3 per cent of GDP in 1996-97 to 5.6 per cent in 1999-2000. In absolute terms, the revenue deficit has gone up from Rs 32,654 crore in 1996-97 to Rs 73,352 crore in 1999-2000.