Fiscal Responsibility Or Fisc’s Liability? Some Quick Comments On The Impact Of Fiscal Targets Of Frbm Acts Of Sub-national States

Fiscal Responsibility or Fisc’s Liability? Some Quick Comments on the Impact of Fiscal Targets in FRBM Acts of Sub-National States

Paper Submitted as part of Refresher course in Public Economics 28 May—22 June, 2006

National Institute of Public Finance and Policy, New Delhi

SANTHOSH T VARGHESE Lecturer in Economics Government College, Malappuram Affiliated to Calicut University, Kerala http://www.santhoshtv.in http://www.alwayseconomics.blogspot.com http://www.facts-unmasked.blogspot.com

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Fiscal Responsibility or Fisc’s Liability? Some Quick Comments on the Impact of Fiscal Targets in FRBM Acts of Sub-National States

1 Introduction From the neoclassical perspective the deficit is an arbitrary accounting construct whose value depends on how the government chooses to label its receipts and payments [Kotlikoff 1989]. However, in an era of Structural Adjustment and Stabilisation Policies, the concept of govt. deficit then and there summons a sceptical closer look and deficit reduction becomes a hallowed objective to be implemented across-the-board. Macro economic and debt stabilization are indeed economic objectives to be aimed at in a developed economy that too in a long run perspective but its relevance in a developing economy like India is in suspicion where the primary concern is development itself rather than the growth rates and its associated trickle-down effects precisely for the reason that there is abject poverty, illiteracy and virtual stagnation of the agricultural sector where still 50 percent of the work force belongs.

Furthermore, the eventual objective of the FRBM Act is highly susceptible given the words of the all-influential Milton Friedman, the champion economist of free market economy who clearly articulated that “A balanced budget amendment . . . is a means to an end. The end is holding down the growth of

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(or better sharply reducing) government spending” (Wall Street Journal, 4 January 1995, p. 12). It is pointed out that while such an objective may or may not be desirable on its own merits, the statement clarifies that the current budget debate has less to do with solvency and more with preferences over the optimal size of the public sector [Corsetti and Roubini 1996]. The context is irrelevant, given the increasing all-embracing influence of the ideology of free market economy, wherefore reminds to approach the issue askance. It is in this backdrop the study attempts to dissect the impact of FRBM Acts enacted by selected state governments and its impact upon the developmental interventions and the consequent implications for growth and development prospects of the state economies in particular and the national economy in general.

2 Structure of the Paper The paper has been divided into eleven parts: the first and second sections are introductory, the third gives a brief note on the international experience, the fourth furnishes the essence of the Act, the fifth explains the backdrop of its extension to the sub-national level, the sixth critically reviews the literature, the seventh, eighth, ninth and the tenth sections deals with the context and analysis of the study and the last section gives the concluding remarks.

3 A Peek on International Experience The recent kick-starting towards govt. deficit reduction is made by the US enactment of The Gramm-Rudman-Hollings Balanced Budget and Emergency

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Deficit Control Act of 1985 during the Reagan era. But it could achieve only modest deficit reductions, given the mandatory social security expenditures, which compelled its revision to the Budget Enforcement Act 1990 which did not impose any deficit target but made a distinction between mandatory expenditures (not subject to targets) and discretionary expenditures (subject to targets). Experience shows that the Act has been a success in a limited sense for the reason that it restricted only the discretionary government expenditure and really honoured only in the breach, through shifting many expenditures of the US federal government to off-budget heads [Chandrashekar and Ghosh 2004]. New Zealand enacted The Fiscal Responsibility Act in 1994, but it is a country where the government even gave up control over its central bank, and was fully committed to the policies of economic orthodoxy. Eventually, the Growth and Stability Pact of 1997 read with the Maastricht Treaty for the European Union, which stipulated the member countries to keep their deficits below 3 per cent of GDP. But it is also coming under severe pressure, and France and Germany are already seeking ways to make it effectively meaningless and inapplicable to actual fiscal policy [Chandrashekar and Ghosh 2004] .

4 The Act in Essence The Fiscal Responsibility and Budget Management (FRBM) Act 2003 came into effect on July 5 2004, following the issue of the notification by the Finance Ministry with a garland of objectives 1 . There are four major 1

It i s a n A c t t o p ro v i d e f o r t h e r e s p o n s i b i l i t y o f t h e C en t ra l G o v e rn men t t o e n s u r e i n t e r-g e n e r a t i o n a l e q u i t y i n f i s ca l ma n a g e men t a n d l o n g -t e r m ma c ro -e c o n o mi c st abil it y b y ach iev ing sufficien t revenue su rp lu s an d re mo v in g f i s c a l i mp ed i me n t s i n t h e ef f e c t i v e c o n d u c t o f mo n e t a r y p o l i c y a n d p ru d e n t i a l d eb t man ag e me n t c o n s i s t e n t w i t h f i s c a l s u s ta i n a b i l i t y t h ro u g h l i mi t s o n t h e C e n t r a l G o v e rn men t b o r ro w i n g s , d eb t a n d

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requirements in the FRBM Act. First, it requires that along with the Budget the Government has to place before Parliament three statements viz, Medium Term Fiscal Policy, Fiscal Policy Strategy and Macroeconomic Framework. Second, the Act lays down fiscal management principles or the so-called fiscal rules, that the Centre govt. must “reduce the fiscal deficit" (the Rules prescribe 3 per cent of GDP, no target is mentioned in the Act, though) and "eliminate revenue deficit" by March 31, 2008. Third, the Act prohibits the Centre from taking borrowing from the Reserve Bank of India, in effect, bans deficit financing. Fourth, the Parliament must be informed through quarterly reviews on the implementation of the stipulations of the Act to take corrective measures if there are any deviations and no deviation shall be permissible without the approval of Parliament.

There is nothing sacrosanct in the Act, however. The FRBM Act can be amended easily by simply adding a clause to the annual Finance Act and the first amendment has been effected within three days of the Act coming into force, to postpone the date for elimination of revenue deficit from March 2008 to March 2009!

5 The Sub-National Clones of the Act It is the Eleventh Finance Commission that set the ball to roll. It recommended the contents of the monitorable fiscal reform programme and the

d e f i c i t s , g r e a t e r t ra n s p a r e n c y i n f i s ca l o p e ra t i o n s o f t h e C en tr a l G o v e rn me n t an d c o n d u c t i n g f i s c a l p o l i c y i n a me diu m- t er m f r a me wo rk an d f o r ma tt er s c onnect ed the r e with o r inc iden tal (Und e rlin e not in th e t ext )

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role envisaged for the next finance commission in reviewing the monitoring and implementation of the grants given under Article 275 of the Constitution 2 . Prof. Amaresh Bagchi, member of the Eleventh Finance Commission, has given a note of dissent that the commission is not competent to make grants given under Article 275 of the Constitution conditional on implementation of a monitorable programme. But his views were brushed aside 3 by taking shelter in

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Ar. 275 . Grants f ro m t h e Union to certain Stat es .—(1 ) Su ch su ms a s Parlia men t may b y law p ro vid e shall be charged on th e Consolidated Fund of India in each year as g ran ts-in -aid of th e rev enu es of su ch S t ates as Parli amen t may d e termi n e to b e in ne e d of assistanc e , and d ifferen t su ms ma y b e fix ed fo r d ifferent States : Provided th at th ere sh all b e paid out of th e Conso lidated Fund of India as g rants-in -aid of the rev enu es of a State such capital and recu rring su ms as may be necessary to en able th at State to meet th e costs of su ch sch emes of develo p men t as may b e un dertaken b y th e State with th e ap prov al of the Go vern men t of India fo r the pu rp ose of p ro mo tin g th e welf are of th e Sch edu led Trib es in th at State o r raising the level of administration of th e Scheduled Areas therein to that of the administration of th e rest of th e areas of that State:

Provided further that there shall be paid out of the Consolidated Fund of India as grants-in-aid of the revenues of the State of Assam sums, capital and recurring, equivalent to— (a) the average excess of expenditure over the revenues during the two years immediately preceding the commencement of this Constitution in respect of the administration of the tribal areas specified in Part I of the table appended to paragraph 20 of the Sixth Schedule; and (b) the costs of such schemes of development as may be undertaken by that State with the approval of the Government of India for the purpose of raising the level of administration of the said areas to that of the administration of the rest of the areas of that State. (1A) On and from the formation of the autonomous State under article 244A,— (i) any sums payable under clause (a) of the second proviso to clause (1) shall, if the autonomous State comprises all the tribal areas referred to therein, be paid to the autonomous State, and, if the autonomous State comprises only some of those tribal areas, be apportioned between the State of Assam and the autonomous State as the President may, by order, specify; (ii) there shall be paid out of the Consolidated Fund of India as grants-in-aid of the revenues of the autonomous State sums, capital and recurring, equivalent to the costs of such schemes of development as may be undertaken by the autonomous State with the approval of the Government of India for the purpose of raising the level of administration of that State to that of the administration of the rest of the State of Assam. (2) Until provision is made by Parliament under clause (1), the powers conferred on Parliament under that clause shall be exercisable by the President by order and any order made by the President under this clause shall have effect subject to any provision so made by Parliament: Provided that after a Finance Commission has been constituted no order shall be made under this clause by the President except after considering the recommendations of the Finance Commission. 3

It is instructive to take note of the fact that he is the only expert in the Eleventh Finance commission on Public Finance and his arguments were summarily rejected. It is often pointed out in the media that it is the politicians alone who sideline economic rationale for their own ‘political’ ends. In the instant case it is economists and non politicians that unloaded the weighty arguments of the expert in Public Economics!

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the normative concept of sound finance in the Article 280 (3d) of the Constitution 4 . As such the Twelfth Finance Commission made the recommendations that state should enact a fiscal responsibility legislation (Chapter 16 of Twelfth Finance Commission, Summary of Recommendations, Item No. 8, Para 4.79) 5 and linked it as a pre-condition for availing debt relief (Item No. 45, Para 12.36) 6 Thus the stage was set for enacting FRBM Acts across states as a precondition for getting debt relief including debt swap with a larger view to furnish an enabling environment for the celestial navigation of the market reform process, ironically enough, brought about through state intervention! By and large, the Acts enacted by state governments religiously follows the spirit of the fiscal prudence rules in the Centre’s Act; small differences in the targets can be observed however.

6 Review of the Literature In this section a brief review of the various arguments posited in relation to the legislation of FRBM Acts has been attempted. The arguments in support of 4

Ar 280 (3d) any other matter referred to the Commission by the President in the interests of sound finance. 5

Each state should enact a fiscal responsibility legislation, which should, at a minimum, provide for (a) eliminating revenue deficit by 2008-09; (b) reducing fiscal deficit to 3 per cent of GSDP or its equivalent, defined as the ratio of interest payment to revenue receipts; (c) bringing out annual reduction targets of revenue and fiscal deficits; (d) bringing out annual statement giving prospects for the state economy and related fiscal strategy; and (e) bringing out special statements along with the budget giving in detail the number of employees in government, public sector, and aided institutions and related salaries. 6 Each state must enact a fiscal responsibility legislation prescribing specific annual targets with a view to eliminating the revenue deficit by 2008-09 and reducing fiscal deficits based on a path for reduction of borrowings and guarantees. Enacting the fiscal responsibility legislation on the lines indicated in chapter 4 will be a necessary pre-condition for availing of debt relief.

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the Act that may bring about macro economic and debt stabilisation are given in the first part and then the studies that critically dissect it are given.

I Kopits (2001) argued that India’s public deficit bias and indebtedness cannot be sustained much longer, especially with stepped-up external liberalisation. In these circumstances, the promotion of capital formation, maintenance of market confidence, and high sustained growth, require formulation of a broad strategic approach at fiscal consolidation – with close attention to the quality of adjustment. A central aspect of such a strategy is the adoption of a permanent framework for a rules-based fiscal discipline, as proposed under the Fiscal Responsibility Bill.

Rangarajan (2007 a & b) pointed out that even if we achieve zero revenue deficit and use borrowings only for investment expenditure we still need a control over it since the investments made out of the borrowings do not generate returns sufficient to service the debt and whatever good results it generated in the recent past is only the result of a fortuitous combination of circumstances that are beginning to reverse where the slack in the economy has been fully absorbed and the ‘output gap’ fully bridged. Hence, it is pointed out that the persuasive argument for an expansionary fiscal stance has no space. Hence he argued that it is important to be committed to fiscal responsibility which will strengthen the growth momentum which in turn makes it possible to meet deficit targets and still leave enough resources for meeting the expenditure needs.

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Srivastava (2006) mentioned that one important advantage of a deficit ceiling is that it introduces a hard budget constraint and forces the government to prune unproductive expenditures and substitute these by productive expenditures.

II Patnaik (2001 and 2006) questioned the idea that government expenditure financed by a fiscal deficit either through monetisation or borrowing will necessarily leads to an unsustainable burden of public debt. He accentuated that fiscal deficit will finance by itself by generating an excess of domestic private savings over private investment exactly equal to itself whether the economy is demand or supply constrained. He also pointed out that the target fiscal deficit ratio cannot remain constant as stipulated by the Act as it is not independent of the rate of inflation in the economy.

Bhaduri (2006) observed that since the act was not crisis-driven, but strategy-driven and wherefore it is logical to consider what strategic interests of the Indian economy would be served by this act. He remarked that it is a cruel joke in the present Indian context to talk of inter-temporal optimal choice involving successive future generations when about half of our children remain undernourished, with India heading in the 21st century as the country with the highest number of illiterates and homeless and as such, crippling

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government action certainly does not serve the interests of the poorer section of the Indian population.

Rakshit (2001) argued that borrowing to finance the govt. expenditure will not necessarily put burden upon the future generations as taxes for servicing public debt and those receiving interest incomes from the government, both belong to the same generation. Moreover, the structural features of the developing countries will render monetary policy relatively ineffective but will make expansionary fiscal policy effective.

The concept of ‘deficit pessimism’ in the literature on reforms has been put under critical scrutiny by Ram Mohan, Dholakia and Karan (2004) 7 . They eventually raised the question whether the Act is required in the first place as they found that a growth rate of 6.5 per cent is enough for the purpose of making central debt position sustainable based on the data on debt that is publicly available 8 ; that too at a level of fiscal deficit that is higher than that mandated by the FRBM Act. 7

They subjected this proposition to critical scrutiny in tw o ways. First, using a decomposition model, they separated out the effects of grow th and government behaviour over the past decade. Assuming that government behaviour of the recent past will continue, it asked what grow th rate would be required in order to make the central debt position sustainable. Sustainability here means bringing the debt to GDP ratio down to 50 per cent by the end of the decade, that is, 2009-10 from the present level of 56.8 per cent. They found that a grow th rate of 6.5 per cent suffices for the purpose. Even if the growth rate falls below this level, the order of fiscal adjustment required would be modest. Next, positing a growth rate of 6. 1 per cent in the coming years and making suitable assumptions about revenue buoyancy and other receipts, they empirically estimated the growth in primary expenditure that would be permissible.

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There is an inexplicable accretion to debt of around Rs 100,000 crore every year in the Kelkar Task Force (KTF) projections. Their projections were based on the data on debt available in the public domain and reflected in the estimates of Rangarajan and Srivastava (2003), CMIE and the CAG. They further pointed out that if there is some hidden component to the debt that is known only to those in government and that is impacting on the whole question of sustainability, that is a obviously a matter on which they cannot comment at this point.

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At last even the Planning Commission itself realised that the targets in the present form of FRBM Act does not give much attention to the need for counter cyclical fiscal policy and the cyclically adjusted fiscal deficit and suggested that there exist a case for redefining the approach to FRBM [GOI 2006].

7 The Context of the Study As mentioned above the FRBM Act mandates four requirements to be complied with. The paper, however, zeros in on only the second aspect of the FRBM Act familiarly called as the fiscal prudence rules that the fiscal deficit must be contained to 3 percent of the GDP and zero deficits in the revenue account.

Simply put, fiscal deficit is the expenditure of the govt. made over and above the revenue receipts and the non-debt creating capital receipts of the govt. It is the amount of govt. borrowings needed to finance its expenditure. When the fiscal deficit is in the increase, homilies are often invoked liking it to as running the total home expenditure through borrowing, that it will eventually undermine the financial condition of the home. Hence, fiscal deficit is often approached as a monster that undermines the stability of the economy from a macro perspective. It is pointed out that however that whether the fiscal deficit will lead to instability depends upon a number of factors like how productively the investments are made and how effectively is the govt. mobilizing tax and non-tax revenue from

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the additional income generated from the investments [Gulati 1993; George 2006].

On the other hand, it is often argued that there should not be any sort of revenue expenditure financed through the borrowed funds since it is tantamount to meeting household consumption out of outside borrowing and it is pointed out that, both at the Centre and in the states, a significant proportion of the borrowed funds are used up for current consumption like payment of salaries, pensions and subsidies [Rangarajan 2007 a]. But it is already illuminated that the distinction between revenue and capital account is not helpful to dissect the effect and purpose of govt. spending [Gulati 1993]. For instance, the spending on education has a much larger revenue component than on many capital outlays that falls under capital account but is highly productive. It is computed that the return on social services that includes education is 7.0 percent much higher than that of many capital outlays [George 2006]. The age old accounting practise of making the distinction between revenue and capital account expenditures is gravitating criticism from various quarters.

Rakshit (2001) punctuated that some important items of government expenditure that are treated as current, benefit the future (by raising the community’s future production potential) rather than the present generation 9 9

The most important of these items are education, health, grant for supporting (public or private sector) R and D and costs incurred in connection with setting up institutions for improvement in the working of the economic system.

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but have a negative impact on the government’s revenue balance, as conventionally measured. For this very reason these types of expenses are considered crucial for long term development of a country and any practice of putting them on the same footing as other items of revenue expenditure cannot but produce gross distortions in budgetary measures. Recently [GOI 2006] punctuated the necessity to re-define revenue-capital distinction in the govt. expenditures though in the context of grants 10 under various central schemes nevertheless points to the attenuating distinction between revenue and capital expenditures. In addition, it has already been argued that we need to incorporate the concept of Quality of Fiscal Discipline instead of focusing merely on quantity of reduction of deficits as a proportion of Gross Domestic Product [Kannan and Mohan 2003].

What boils down is the present classification of govt. expenditures into revenue and capital account does germinate grave classification problems that have far reaching consequences in titanic dimensions at multiple levels to the nation’s economy in the post FRBM milieu. It is in this backdrop the present study attempts to take a closer look upon the classification of various expenditures of the govt. and attempts to approach the expenditure items from a different angle by giving due importance to that expenditures which are so essential to the economy to raise its productive capacity continuously which will

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For example, the entire budgetary expenditures on Bharat Nirman, the National Employment Guarantee, the Backward Regions Grant Fund, the Jawaharlal Nehru National Urban Renewal Mission, and all new schemes in agriculture such as the National Horticulture Mission are classified as revenue expenditure since they are in effect grants to implementing agencies in the states, even though they finance asset creation on the ground.

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even have inter-temporal benefits. There is an express need to re-classify the expenditure items by taking into account the essence of the discussion already made. Apart from that it is high time to look upon the composition of fiscal deficit rather than focussing robotically upon its absolute quantity.

8 Incongruity between expenditure adjustment and its effects In elucidating the significance of the twin targets in the FRBM Act, Rangarajan (2007) argued that even a zero revenue deficit would not suffice as still borrowings can be used to finance capital expenditure which will certainly become revenue expenditure tomorrow and therein lays the significance for twin targets. Two options then follows that either the govt. must cut capital expenditure financed by borrowing even in the midst of zero revenue deficits or it must be financed entirely through revenue surplus.

Generating revenue surplus hinge on the space available for revenue mobilisation and the extent by which the revenue expenditure is being cut. Given the fact even a modest rise in tax-GDP ration required at least fifteen years of tax reform process, any dramatic increase could only be expected over a fairly long stint of time that too with in the pale of the tax optimality constraints, it would be safe to place little optimism in this regard. It will compel to take recourse in the inescapable option of revenue expenditure cut and how much it would be cut down hang on how much increase in revenue receipts could be brought about. It is worth noting the fact that there exist obvious limits to the revenue mobilisation

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given tax optimality constraints, the pinch will be felt certainly by the revenue expenditure. Be that as it may, the expenditure on social and economic services; where the education, health, irrigation, upon which the formation of human capital and the productivity of the economy so decisively reside; will be the causality at least over a fairly long period of time over which only the tax-GDP ratio would improve even in an optimistic scenario. Since it is the present stock of capital that decisively determines factor productivity of the economy, the growth and development prospects of the future generation is sacrificed so effortlessly at the alter of intergeneration equity. True, the revenue expenditure cut on social and economic services can be reinstated at any point of time when there is an increase in tax-GDP ratio but, disfigurement inflicted upon the human capital formation cannot be restored retrospectively, given its peculiar nature thereby highlights the incongruity between expenditure adjustments and the beneficial effects.

9 Post FRBM Scenario and its effects upon State Finances Arguments for deficit reduction are often replete with homilies like—the state cannot live beyond its means, often draws an analogy between the state and a household. Whether it is legitimate or not, taking the cue out of it, why does it cannot be argued that; since the household resorts to borrowing to fund higher education of its children even at a higher rate than that offered on luxury cars— what deters the state in resorting to borrowing to finance its education or social service expenditures even under revenue account. Households seldom consider spending on education out of borrowed money or even financing it through 15

selling assets as current consumption. Then why does the same thing done by the state is considered as current consumption 11 ?

What boils down is it is instructive to compute how much of revenue receipts and borrowings are spent on current consumption. The study attempts to find out these figures by excluding: (1) the productive expenditures under revenue account for computing the revenue deficit since expenditure on social and economic services are generally considered as developmental and productive and hence not part of current consumption 12 , and (2) excluding the total developmental expenditure from the fiscal deficit to arrive at a more meaningful measure to better comprehend the amount of borrowing that is required to meet the current consumption of the govt. They are called as adjusted revenue deficit (ARD) and adjusted fiscal deficit (AFD) just for the sake of convenience in referring them. It is underscored that these are only measures to just find out how much expenditure is incurred out of revenue and borrowings to meet the current consumption of the govt. in the limited context of this paper. Three states are taken into account for the analysis and they are Kerala, Karnataka and Punjab. The first one has remarkable achievement in human development which has a huge revenue component as per the convention, the second is generally considered as the most frugal in fiscal matters and the third one achieved fiscal 11

Whether the state can recoup the money spent on education in the revenue account is another issue that should be dealt in another plane given the fact that these types of expenditures generate wide ranging pecuniary externalities spread across the nation. It all depends upon the efficiency of the tax administration and collection machinery of the state since it is axiomatic that proper education will certainly raise factor productivity through human capital formation and if wages are equal to marginal product there will be a corresponding increase in the income of the individual.

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It is true that some sort of wastage can still be observed even in this classification, but by and large these developmental expenditures are safe to be considered as developmental expenditures.

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improvement but one among the richest states of the nation. These peculiarities formed the basis of their selection.

10 The Impact upon Selected States As mentioned in the above section the study attempts to analyse two facts: (1) how much money is spent from revenue and borrowings on current consumption by focussing upon the ‘adjusted revenue and fiscal deficits’ computed in the limited context of the study and (2) what happened to the developmental expenditure especially in the revenue account and there by computed the ratios of (a) development expenditure in the revenue account to revenue receipts, (b) total development expenditure to total receipts, (c) total development expenditure to total expenditure. To get a fuller view of the process the performance in revenue and fiscal deficit has been juxtaposed along with these results with the help of figures adjoined below.

Regarding the first aspect it is found that, all the three states are not spending for current consumption out of borrowed funds and there is surplus in the revenue account in the limited sense drawn for the purpose of the study (See rows 21 and 22 in tables 2, 3 and 4 adjoined below).

Turning to the second aspect of—development expenditure in the revenue account to the total revenue receipts; it is found that during the last three years there is a considerable squeeze in the development expenditure in the revenue account for the most fiscally improving states of Karnataka and Punjab (See row 17

27 in tables 2, 3 and 4). In the case of the former it nosedived from 68. 83 percent to 52.84 percent (2002-03 to 2004-05) and in the case of the latter it plummeted from 51. 96 percent to 43.12 percent (2003-04 to 2005-06). Nonetheless, it remained almost same in the case of Kerala however it declined marginally. The fact that to be noticed that, in Karnataka and Punjab, there happened impressive improvement in the reduction of revenue deficit, but it seems that it happened at the cost of development expenditure in the revenue account. With respect to the last two aspects in the second question, the remarkable deficit reduction in Karnataka and Punjab did not result in any improvement in the development expenditure (See table 1). In the case of Karnataka the TDE/TR ratio (total development expenditure to total receipts) registered only a marginal rise and in the other cases it declined noticeably. The decline in the case of Punjab is carefully explored further as it is a state that achieved remarkable improvement in fiscal health as per the conventional standards. In Kerala both these ratios declined but slightly.

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Table 1 Comparison of Total development expenditure (TDE) to total receipts (TR) and Total expenditure (TE) STATES KERALA KARNATAKA PUNJAB

TDE to TR and TE TDE/TR TDE/TE TDE/TR TDE/TE TDE/TR TDE/TE

Year 1998-99 85.85 60.71 NA NA NA NA

19992000 88.92 56.75 85.91 64.71 65.50 46.08

200001 78.03 54.25 83.21 64.87 67.79 48.05

200102 71.52 52.63 90.39 65.39 60.60 40.24

200203 80.99 55.26 81.82 62.51 53.08 38.06

200304 72.54 49.49 69.72 57.33 56.80 40.61

200405 72.28 54.45 70.07 61.60 57.27 44.22

200506 67.86 53.33 NA NA 51.12 44.25

Source: CAG Reports, Relevant Years

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The Case of Kerala Table 2

Sl. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Trends in Kerala Government Finance

Item Heads Revenue Receipts Miscellaneous Capital Receipts (non debt) Total revenue & Non debt capital receipts (1+2) Recoveries of Loans and Advances Total Receipts (2+3) Revenue expenditure Social Services Economic Services DE in RA (7+8) Capital Expenditure Social Services Economic Services DE in CA (11+12) Total DE (9+13) Disbursement of Loans and Advances Total Exp.(6+10+15) Revenue Deficit (1-6) Fiscal Deficit (5-16) Gross State Domestic Product (GSDP) FD/GSDP Adjusted RD (17+9) Adjusted FD (18+14) TDE/TR TDE/TE CDE/TE RDE/TE RDE/RR

All figues in Crores Year 2000- 2001- 2002- 200301 02 03 04 8731 9056 10634 11815

199899 7198

19992000 7942

200405 13500

200506 15295

0

0

0

0

0

0

0

0

7200

7944

8731

9056

10638

11815

13500

15295

67 7267 9228 3349 2293 5642 652 80 517 597 6239

53 7997 11566 4206 2304 6510 648 66 535 601 7111

117 8848 11878 4188 2178 6366 577 58 480 538 6904

55 9111 11662 4076 1908 5984 558 59 473 532 6516

77 10715 14756 5038 2982 8020 699 83 575 658 8678

73 11888 15495 5025 2999 8024 640 56 544 600 8624

95 13595 17169 5879 3307 9186 682 90 550 640 9826

52 15347 18424 5896 3772 9668 817 133 614 747 10415

397 10277 -2030 -3010

317 12531 -3624 -4534

271 12726 -3147 -3878

160 12380 -2606 -3269

250 15705 -4122 -4990

1292 17427 -3680 -5539

196 18047 -3669 -4452

287 19528 -3129 -4181

56247 5.35 3612 3229 85.85 60.71 5.81 54.90 78.38

62514 7.25 2886 2577 88.92 56.75 4.80 51.95 81.97

72402 5.36 3219 3026 78.03 54.25 4.23 50.02 72.91

72402 4.52 3378 3247 71.52 52.63 4.30 48.34 66.08

81146 6.15 3898 3688 80.99 55.26 4.19 51.07 75.42

89461 6.19 4344 3085 72.54 49.49 3.44 46.04 67.91

100531 4.43 5517 5374 72.28 54.45 3.55 50.90 68.04

111633 3.75 6539 6234 67.86 53.33 3.83 49.51 63.21

Source: CAG Reports, Relevant Years

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Figure 1

100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 1998-99

19992000

2000-01

2001-02

2002-03

2003-04

TDE/TR

2004-05

2005-06

TDE/TE

Figure 2 0 1998-99

19992000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

-1000

-2000

-3000

-4000

-5000

-6000

Revenue Deficit (1-6)

Fiscal Deficit (5-16)

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The Case of Karnataka Table 3

Sl. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Trends in Karnataka Government Finance

Item Heads Revenue Receipts Miscellaneous Capital Receipts (non debt) Total revenue & Non debt capital receipts (1+2) Recoveries of Loans and Advances Total Receipts (2+3) Revenue expenditure Social Services Economic Services DE in RA (7+8) Capital Expenditure Social Services Economic Services DE in CA (11+12) Total DE (9+13) Disbursement of Loans and Advances Total Exp.(6+10+15) Revenue Deficit (1-6) Fiscal Deficit (5-16) Gross State Domestic Product (GSDP) FD/GSDP Adjusted RD (17+9) Adjusted FD (18+14) TDE/TR TDE/TE CDE/TE RDE/TE RDE/RR

All figures in Crores Year 2001- 2002-03 2002 15321 16169

19992000 12906

20002001 14823

200304 20760

2004-05

0

0

0

0

0

0

12906

14823

15321

16169

20760

26163

145 13051 15231 5479 4004 9483 1779 377 1352 1729 11212

101 14924 16685 6132 4388 10520 1947 299 1600 1899 12419

35 15356 18605 6429 5397 11826 2106 212 1842 2054 13880

928 17097 18815 6326 4803 11129 2936 295 2565 2860 13989

64 20824 21285 6965 4652 11617 3029 427 2474 2901 14518

45 26208 24523 7723 6102 13825 4674 486 4052 4538 18363

317 17327 -2325 -4276

511 19143 -1862 -4219

514 21225 -3284 -5869

628 22379 -2646 -5282

1011 25325 -525 -4501

611 29808 1640 -3600

94972 4.50 7158 6936 85.91 64.71 15.42 54.73 73.48

104541 4.04 8658 8200 83.21 64.87 15.29 54.95 70.97

109016 5.38 8542 8011 90.39 65.39 14.80 55.72 77.19

120062 4.40 8483 8707 81.82 62.51 20.44 49.73 68.83

132498 3.40 11092 10017 69.72 57.33 19.98 45.87 55.96

147956 2.43 15465 14763 70.07 61.60 24.71 46.38 52.84

26163

Source: CAG Reports, Relevant Years

22

Figure 3

100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 19992000

20002001

TDE/TR

20012002

2002-03

2003-04

2004-05

TDE/TE

Figure 4 3000 2000 1000 0 -1000

1999-2000

2000-2001

2001-2002

2002-03

2003-04

2004-05

-2000 -3000 -4000 -5000 -6000 -7000 Revenue Deficit (1-6)

Fiscal Deficit (5-16)

23

The Case of Punjab Table 4

Sl. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Trends in Punjab Government Finance

Item Heads Revenue Receipts Miscellaneous Capital Receipts (non debt) Total revenue & Non debt capital receipts (1+2) Recoveries of Loans and Advances Total Receipts (2+3) Revenue expenditure Social Services Economic Services DE in RA (7+8) Capital Expenditure Social Services Economic Services DE in CA (11+12) Total DE (9+13) Disbursement of Loans and Advances Total Exp.(6+10+15) Revenue Deficit (1-6) Fiscal Deficit (5-16) Gross State Domestic Product (GSDP) FD/GSDP Adjusted RD (17+9) Adjusted FD (18+14) TDE/TR TDE/TE CDE/TE RDE/TE RDE/RR

All figures in Crores Year 2001- 2002- 20032002 03 04 8929 11071 12139

19992000 7468

20002001 9377

200405 13807

200506 16966

0

0

0

0

0

0

0

7468

9377

8929

11071

12139

13807

16966

109 7577 10195 2716 1846 4562 439 42 359 401 4963

127 9504 11713 2993 2100 5093 1393 53 1297 1350 6443

872 9801 12710 3111 1866 4977 984 54 908 962 5939

103 11174 14825 3222 2310 5532 420 22 377 399 5931

105 12244 15702 3368 2939 6307 665 5 642 647 6954

134 13941 17198 3536 3738 7274 761 92 618 710 7984

137 17103 18207 3602 3714 7316 1517 344 1083 1427 8743

137 10771 -2727 -3194

302 13408 -2336 -3904

1066 14760 -3781 -4959

339 15584 -3754 -4410

757 17124 -3563 -4880

97 18056 -3391 -4115

33 19757 -1241 -2654

62700 5.09 1835 1769 65.50 46.08 3.72 42.35 61.09

68448 5.70 2757 2539 67.79 48.05 10.07 37.98 54.31

76860 6.45 1196 980 60.60 40.24 6.52 33.72 55.74

86260 5.11 1778 1521 53.08 38.06 2.56 35.50 49.97

95947 5.09 2744 2074 56.80 40.61 3.78 36.83 51.96

107384 3.83 3883 3869 57.27 44.22 3.93 40.29 52.68

113161 2.35 6075 6089 51.12 44.25 7.22 37.03 43.12

Source: CAG Reports, Relevant Years

24

Figure 5

80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 19992000

20002001

20012002

2002-03

2003-04

TDE/TR

2004-05

2005-06

TDE/TE

Figure 6 0 -1000

19992000

20002001

20012002

2002-03

2003-04

2004-05

2005-06

-2000 -3000 -4000 -5000 -6000 Revenue Deficit (1-6)

Fiscal Deficit (5-16)

25

11 Concluding remarks The study attempted to analyse the impact of FRBM Act on the developmental expenditures of selected states. It approached the issue by critically discussing and dissecting the backdrop of FRBM initiates and its consequences upon the future growth and development prospects of the economy. For analytical purposes the study used its own measures and explained their relevance in the context elsewhere.

The study found that the popular notion that the govt. is meeting its current consumption out of borrowed funds is not correct. It seems that the remarkable improvement in the fiscal health of Karnataka and Punjab happened at the cost of developmental expenditures in the revenue account. It also found that there is no improvement in the total development expenditure of all the three states even in the midst of improvement in fiscal health as per conventional standards. All this witnessed in the post FRBM scenario and will certainly have consequences upon the economy, whether it is beneficial or detrimental can be answered conclusively only by exploring deeply. If it is detrimental then it would become a liability to the fisc.

26

References

1. Bhaduri, Amit (2006): ‘The Politics of ‘Sound Finance’’ Economic and Political Weekly November 4, 2006, pp 4569-4571

2. Chandrasekhar C P and Ghosh, Jayati (2004) ‘Fiscal Responsibility and Democratic Accountability’ The Hindu, Friday, Jul 23, 2004.

3. Corsetti Giancarlo and Roubini Nouriel (1996) ‘European versus American Perspectives on Balanced-Budget Rules’ The American Economic Review, Vol. 86, No. 2, Papers and Proceedings of the Hundredth and Eighth Annual Meeting of the American Economic Association San Francisco, CA, January 5-7, December. 1996, pp. 408-413.

4. George, K K (2006): ‘Major Issues in State Level Fiscal Reforms’, in Srivastava, D K and Narasimhulu, M (2006): State Level Fiscal Reforms in the Indian Economy, (New Delhi: Deep and Deep Publications)

5. GOI , (2006): ‘Towards Faster and More Inclusive Growth: An Approach to the 11th Five Year Plan’, (New Delhi: Planning Commission)

6. Gulati, I S (1993): ‘Taackling the Growing Burden of Public Debt’, Economic and Political Weekly, May 10, 2006.

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7. Kannan K P, Mohan R (2003): ‘India's Twelfth Finance Commission. A View From Kerala’, Working Paper 354 December, (Trivandrum: Centre of Development Studies)

8. Kopits, George (2001): ‘Fiscal Policy Rules for India?’ Economic and Political Weekly March 3, 2001, pp 749-756

9. Kotlikoff, Laurence J., (1989): ‘From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy’ Working Paper No. 2841, (Massachusetts Avenue Cambridge: National Bureau Of Economic Research)

10. Patnaik, Prabhat (2001): ‘On Fiscal Deficits and Real Interest Rates’, Economic and Political Weekly, April 14, 2001, pp 1160—1163.

11. Rakshit Mihir (2001): ‘Restoring Fiscal Balance through Legislative Fiat:The Indian Experiment’, Economic and Political Weekly, June 9, 2001, pp 2053-2062.

12. Ram Mohan T T, Dholakia H and Karan, Navendu (2004): ‘Is India's Federal Debt Sustainable?-Revisiting an Old Debate’ IIMA Working Papers No. 2004-11-02

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13. Rangarajan C (2007a): ‘Earnest about Fiscal Responsibility’ The Economic Times, Delhi Edition, 19-02-07, pg 15

14. Rangarajan C (2007b): ‘In Defence of Fiscal Adjustment’ The Economic Times, Delhi Edition, 20-02-07, pg 16

15. Srivastava D K (2006): ‘FRBM Act and Eleventh Plan Approach Paper’, Economic and Political Weekly November 4, 2006, pp 4553-4559.

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