A more definite framework is needed to ensure fiscal prudence for sustained growth
The post-pandemic Union Budget of 2021-22 has sought to embrace some suggestions for long-term fiscal reforms that have persisted from the pre-pandemic economy. These include a centrally sponsored public healthcare scheme, comprehensive infrastructure growth and FDI promotion scheme, recapitalisation of Public Sector Banks (PSBs), a single portal for benefit transfers to unorganised sector migrant workers and increasing long-term infrastructure investment (that yields enough returns to boost national economic growth). Other notable changes include increasing the scope of taxable supplies under GST law, introducing an 'agriculture infrastructure and development cess' on imported and excisable goods, enhancing the corpus of the Contingency Fund of India to Rs 30,000 crore, and providing a provisional Rs 35,000 crore for COVID-19 vaccination efforts.
A notable feature of this year's Budget was the ballooning deficit at 9.5 per cent of GDP. Although this has been widely credited to a pandemic-affected economy to some extent, it must be borne in mind that India's COVID-19 stimulus packages have been modest compared to most countries with similar size of the economy. The measures to improve public infrastructure — particularly without increasing tax rates in this year's Budget — have been prioritised despite a worrisome increase in the fiscal deficit, a difficult decision that the Union Government was forced to make this year.
Although the pathway and the pace of economic revival are unpredictable, it is important to retain government accountability in public expenditures, i.e., whether the government has adhered to principles of fiscal prudence even in times of a global crisis. For this reason, the effectiveness of the Fiscal Responsibility and Budget Management Act (FRBM Act), 2003 has received much attention recently. It primarily sets a target for the balancing of fiscal deficit of the country and has been followed by similar fiscal responsibility legislations across states in India.
Fiscal responsibility laws are meant to ensure that elected representatives do not forsake sustained economic growth in the long term, for economic "quick fixes" (such as discretionary or inflationary policies) or expenditures that will prove to be expensive for a future generation of taxpayers. However, there is no evidence till date that the reduction of a government's debt directly correlates to the introduction of such laws.
Fiscal responsibility laws (particularly in India), do not spell out consequences for failure to achieve a target of reduced fiscal deficit rate before a certain time period. In the past, the Union Government was able to suspend the target reduced fiscal deficit rate until the economy had stabilised following the Global Financial Crisis of 2007-08. Further, the Proviso to Section 4 of the FRBM Act allows the government to exceed revenue and fiscal deficit targets on "exceptional grounds" — a term which is not clearly defined in the Act.
The stipulated targets for reducing fiscal deficit may not be the product of rigorous economic analysis. Most Indian states set their target rates at a similar range of 3-5 per cent, even though the revenue, government expenditure and per capita wealth vastly differs across Indian states. These target rates have not changed despite the fact that the Centre now collects revenue earned in states under the GST mechanism and apportions revenue that significantly differs from the pre-GST collections.
Most importantly, there is no mechanism for a layman to easily determine whether a particular expenditure or inter-governmental grant is the outcome of a careful determination of future consequences or an ad hoc decision. This may be contrasted to the United States, where federal expenditure is largely the product of inflexible legislation (leaving little room for discretionary expenditures having significant economic outcomes).
To a certain extent, a rapidly developing country cannot be faulted for the economic inefficiency that occurs while putting out fires in several places–be it natural disasters, combating the myriad effects of poverty or building infrastructure with a shortage of resources. At the same time, the economic impact of global disasters including pandemics, security risks or the long-term effects of climate change are wildly unpredictable. Long-term macroeconomic reforms must be based on legislations that bind the elected leaders of the present to the welfare of the future — either in the form of committed sectoral expenditures or innovative fiscal responsibility legislation. Without such legislation, we may not be certain that the laudable efforts of the present government, in making bold allocations to public infrastructure, will persist in the turbulent future of domestic politics and global crises.
The writer is a professor of law & a commercial lawyer practising in Bangalore. Views expressed are personal