Sixth Pay Commission: The FM’s wrong, early govts followed fiscal discipline

S Gangadharan
Wednesday, October 29, 2008 03:57 IST

The fiscal rot assumed an endemic character only from 1979-80

The Union finance minister has been speaking about the budgetary position of the Union government both inside and outside Parliament.

He was candid enough to concede that both revenue and fiscal deficits for 2008-09 are bound to overshoot the projections and

he laid the blame mainly on the multi-pronged global financial crisis for the inability to adhere to the Fiscal

Responsibility and Budget Management Act (FRBMA).

Though no specifics as to the impact of external factors on the fisc were offered, that the problem could have its genesis on

expenditure lurching out of control, such as the implementation of the farm loan waiver scheme and the financial fall-out of

the Sixth Pay Commission recommendations — without a modicum of effort at resource mobilisation — was glossed over.

Many perceptive observers of the fiscal scene had foreseen this change for the worse.
This scenario is ominously coming true. Given the compulsion of coalition politics — and the looming elections — even a

degree of fiscal laxity is understandable, but what we have been subject to is populism running amuck and a complacent view

that all will be well with the fiscal system soon.

Such a stance was taken by P Chidambaram the other day. He averred, “If we are not able to achieve the targets by 31 March

2009, I am sure we can achieve them by 31 March 2010.”

He confessed that he drew comfort from the fact that we had waited for nearly 60 years to achieve some fiscal discipline, and

it did not matter to wait for one more year.

This assertion needs some probing of the evolution of our fiscal policy.
Right from 1951-52 through 1978-79, the Centre had posted a surplus in the revenue account of the budget, save for two years,

1958-59 and 1971-72, and transferred this surplus to the capital account to finance investment.

Thus, for 28 straight years, except for the two years mentioned, there was a conscious effort not only to balance the current

account but to chalk up a surplus to augment borrowings and other receipts to buttress capital spending. And, as regards the

revenue deficits, they were rather inconsequential, being 0.04% and 0.20% of the gross domestic product for 1958-59 and

1971-72, respectively.

What does this record show? It indicates a conscious and consistent endeavour on the part of those who presided over the

Union finance ministry to adhere to the cardinal principle in public finance, namely that the government should learn to live

within its means and, if possible, strive for revenue surplus.

This held out the assurance that the capital receipts — an euphemism for borrowings — augmented by transfer from funds from

the revenue account and deficit financing, were used for furthering development goals.

Seen in this light, from the First five year plan to the Fifth plan and the three annual plan years that had intervened,

revenue deficits were aberrations, and when they were unavoidable, small in magnitude.

So, contrary to what the finance minister has stated, fiscal discipline was an overriding consideration in the making of the

Union budgets till the fag end of the seventies.

The fiscal rot assumed an endemic character from 1979-80 onwards.
The revenue budget was mired in red ink .The decades that followed the launch of economic reforms saw fiscal laxity at its

worst. It was to put an end to this state of affairs that the FRBMA was enacted and by the end of the current year, a zero

revenue deficit was to be realised.

The fiscal deficit was to be contained to 3% of the GDP.
But the implementation of this act proceeded in a lackadaisical fashion and in the speech unveiling the 2008-09 Budget,

Chidambaram said, among other things, that “because of the conscious shift in expenditure in favour of health, education and

social sector, we may need one more year to eliminate the revenue deficit.” He added: “In my view, this is an entirely

acceptable deferment.”

Whether expenditure under these heads would be on a massive scale to justify the shifting of the goal post is not clear as

yet, but what is certain is that big ticket spending such as subsidies, wages and pensions and debt waiver to farmers —

foreseen but not adequately provided for in the budget — has rendered the fiscal arithmetic out of sync with reality.

A deferment of one year may be inconsequential, but when the past pattern is seen and studied, doubts about whether the

government is serious about fulfilling the FRBMA are justified.

The time to administer the first stitch was way back in the eighties. We had missed the bus then and now the painful task of

putting ten stitches brooks no delay. But, dithering is still the name of the game.

With a new government set to assume office next year, whoever dons the mantle of the finance minister will inherit a

difficult fiscal legacy.

If only we can recapture the spirit of the fiscal policy that inspired the Union budgets from the dawn of the fifties to the

late seventies when a fetish was made of a revenue account surplus, things would not have come to such a dire pass in regard

to Central government finances and the FRBMA would be an exercise in superfluity.

Now, the faithful implementation of this act is vital for fiscal salvation, but the zeal and commitment to fulfilling its goals is missing.

Source: http://www.dnaindia.com/