India: Fiscal Reform: Some Issues and Challenges


Deepak K Srivastava

Control of the fiscal deficit has been a long felt need. For this purpose, the Indian parliament has in the last year passed the Fiscal Responsibility and Budget Management Bill (FRBM). Indeed this move is commendable and fits very well within the broader objective of bringing in reform and fiscal prudence. But apprehensions exist as to whether the objective of fiscal prudence can be achieved by means of this bill due to the many already existing loopholes in the Indian fiscal system. Some of these major loopholes will now be discussed.

Revenue collection in India depends directly or indirectly on agricultural output. Indian agriculture still depends on the 'Monsoon'. A poor performance in the agro sector leads to a lack of demand in the domestic economy, which in turn results in less revenue for the exchequer. Therefore, a failure to make an accurate prediction of agro output will lead to a deviation in the estimated revenue and expenditure of the government. Presently the Indian budget making process starts in the month of July or August and takes 8 or 9 months. Normally, the months of July and August are the start of the wet season and accurate predication of agricultural output is not possible. The estimates committee of the second Lok Sabha in its 20th report recommended that the financial year should start from the 1st day of October. The Administrative Reform Commission (ARC) has also recommended that financial year should start from 1 November rather than 1 April.

Another loophole is in the ongoing use of the 'Guillotine' during the budget session in parliament. The 'Guillotine' is a parliamentary process, in which demands for grants are passed without discussion. Usually on the last day of discussion, a substantial number of the demands are passed without any voting or discussion due to a lack of time. Ironically, despite the existence of seventeen standing parliamentary committees, the Guillotine process is continuing. It is defeating the sprit of the constitution. There is an urgent need to improve the functioning of these committees.

The Comptroller and the Auditor General (CAG), a constitutional authority, have limited responsibilities when it comes to the audit of revenues. Revenue from income tax, wealth tax, and expenditure tax are excluded from his purview. Better cash flow management in every administrative ministry is a basic requirement for financial reconstruction and it can be achieved by an audit of revenue.

Another loophole is in the form of the excess grant. An article (Era Sezhiya 'The anarchy of excess grants', Frontline, 8 November 2002) revealed that the accumulated total of non-regularized excess expenditure for all states amounted to Rs1,26,817 Crore as of 31 March 2001. Moreover, many state governments had not regularized their excess expenditure for a period of over 20 to 30 years. In a parliamentary system like India, money should not be spent without the sanction of the legislature. In the case of excess expenditure, the government sends an explanatory note to the Public Accounts Committee. After examination of these notes, the PAC recommends to the legislature that the excess expenditure be regularized. Then the government presents the demand for an excess grant in the legislature. Unfortunately, there is no time limit in the Indian constitution for regularization of excess expenses. But in developed nations like the UK, the government is required to regularize any excess expenditure incurred in previous financial year, before the end of the current financial year. The Administrative Reform Commission (1968) in its 'finance account and audit' recommended a time limit be set for the submission of the report. The National commission to Review the Working of the Constitution (NHRWC) recommended that a statutory provision must be inserted into constitution for appropriation accounts to be submitted to parliament.

The objective of fiscal prudence cannot be achieved without the significant participation of legislators, government and the bureaucracy. Legislators should think beyond partisan concerns to the issue of fiscal reform and reconstruction. The careful framing of rules and the insertion of some amendments in the constitution will help fulfil the purpose of FRBM bill.

WATCHPOINT: Fiscal prudence must be facilitated through the plugging of existing loopholes in the Indian fiscal system.


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