FISCAL CONSOLIDATION IN INDIA

The average combined fiscal deficits, of the Centre and states after 1975, had been above 10 per cent of the GDP till 2000–01. More than half of it had been due to huge revenue deficits. The governments were cautioned by the RBI, the Planning Commission as well as by the IMF and the WB about the unsustainability of the fiscal deficits. It was at the behest of the IMF that India started the politically and socially painful process of fiscal reforms, a step towards fiscal consolidation.50 A number of steps were taken by the government at the Centre in this direction and there had been incessant attempts to do the same in the states’ public finances too. Major highlights in this direction can be summed up as given below:

1. Policy initiatives towards cutting revenue deficits:

(i) Cutting down expenditure—

(a) Cutting down the burden of salaries, pensions and the PFs (down- sizing/right-sizing of the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension reforms-PFRDA, etc.);

(b) Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilizers, sugar, drugs to be rationalised, it was done with mixed successes);

(c) Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of external debts, debt swaps, promoting external lending, minimal dependence on costlier external borrowings, etc.);

(d) Defence being one major item of the expenditure bilateral negotiations initiated with China and Pakistan (the historical and psychological enemies against whom the Indian defence preparedness was directed to, as supposed) so that the defence force cut could be completed on the borders, etc.;

(e) Budgetary supports to the loss-making PSUs to be an exception than a rule;

(f) Expenditure reform started by the governments in different areas and departments;

(g) General Services to be motivated towards profit with subsidised services to the needy only (railways, power, water, etc.);

(h) Postal deficits to be checked by involving the post offices in other areas of profit;

(i) Higher education declared as non-priority sector; fees of institutions of professional courses revised upward; etc.

(ii) Increasing revenue receipts:

(a) Tax reforms initiated (Cenvat, VAT, Service Tax, GST proposed, etc.);

(b) The PSUs to be disinvested and even privatised (if a political concensus reached which alludes today);

(d) State governments allowed to go for market borrowing for their plan expenditure, etc.

2. The borrowing programme of the government:

(i) The Ways and Means Advances (WMA) scheme commenced in 1997 under which the government commits to the RBI about the amount of money it will give as part of its market-borrowing programme, to bring transparency in public expenditure and to put political responsibility on the government.

(ii) The RBI will not be the primary subscriber to government securities in the future—committed way back in 1997.

3. The fiscal responsibility on the governments:

(i) The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 (voted by all political parties) which puts constitutional obligation on the government to commit so many things as fiscal responsibility comes in the public finance—fixing annual targets to cut revenue and fiscal deficits; the government not to borrow from the RBI except by the WMA; government to bring in greater transparency in fiscal operations; along with the Budget the government to lay statements regarding fiscal policy strategy in the House and Quarterly

Review of trends of receipts and expenditures of the government.

(ii) A mechanism (to include state governments under the umbrella of fiscal responsibility) was advised (now implemented, too) by the 12th Finance Commission which allows the state governments to go for market borrowing (without central permission) for their need of plan development provided they pass their fiscal responsibility acts (FRAs) and commit to the fiscal responsibility regarding cutting their revenue and fiscal deficits. By March 2016, all states and UTs had implemented their FRAs.

India’s fiscal consolidation process by now has had a mixed performance. By now, the FRBM Act has been amended twice (in 2004 and 2012), mainly to redefine the fiscal targets or shift the targets to future years. By early 2010, a new school of thinking emerged in the country as per which fixing hard and fast fiscal targets for the governments, at times, may be counterproductive to the economy. This why the GoI through the Union Budget 2016-17 proposed to go for a fixed range for fiscal targets in place of a fixed number. The Government of India has accordingly announced to set up an expert committee to review the implementation of the FRBM Act.