• JULY 2, 2004

Fiscal prudence: Need of the hour?

Reforms are the buzzword in the industry, be it market reforms, financial sector reforms or industrial reforms. But among all the kinds of reforms mentioned above reforms regarding the financial functioning of Government assume the highest importance considering the country’s high fiscal deficit. In this context the fiscal reform measures initiated by the earlier government assume importance. We take a look at few of the proposals suggested by the NDA government in the last budget.

  1. The Budget for FY04 proposed to introduce cash management in various departments and ministries. It was suggested that the budgetary allocations to the ministries would be released every month or every quarter based upon the actual requirement. This will help towards prudence in spending of these ministries and prevent unnecessary spending that happens in the month of February and March.

  2. The government announced to restructure its external debt repayment of external debt looking at the strong foreign exchange reserves. The Government reduced its external debt burden by repaying ADB’s US$1 bn and World bank US$ 2 bn loan in FY04. This measure taken by the government was in line with its view of financing its fiscal requirement through the internal market where interest rates have come down significantly.

  3. In the last budget speech the finance minister announced the buy back of the high cost domestic debt. Most of the debt that was covered under buy-back scheme was thinly traded government high cost securities and most of theses securities were held by the public sector banks. The Budget proposed the buy back of such paper on a voluntary basis from banks, giving them the incentive of tax breaks in case banks used gains from the buy back for provisioning for NPAs. The Government announced a buy back scheme for about Rs 1000 bn. Although the government managed to complete only 30% of this amount, this has helped the government reduce its interest expenses.

  4. The Finance minister also suggested the debt swap for the state government to reduce their high cost debt. This scheme enabled states to prepay high cost debt and substitute them by current, low-coupon-bearing small savings and open market loans. This will help state government to reduce their staggering debt liabilities and help them to focus much more on health, education, social infrastructure, agriculture and irrigation. The scheme was implemented during FY04, with reasonable amount of success.

  5. Administrative reforms of the Direct tax collection was suggested by the finance minister in the last years budget which were taken from the Kelkar Task Force’s Direct Tax recommendations. These recommendations if implemented are expected to result in substantial savings for the government on the administrative front. He suggested outsourcing non-core activities of the tax department and making taxation simple for the people, which will result in huge saving for the department.

All these measures if implemented can bring huge savings for the government in reducing their expenses. The previous government had initiated fiscal prudence measures by passing the Fiscal Responsibility Act in the parliament, the new law however was considerably diluted from its earlier form. The new government, while assuring fiscal prudence has further diluted the targets of the new act. It has targeted the elimination of revenue deficits by 2009 against the earlier target of 2007. The process of fiscal prudence has started and the need of the hour is of stringent implementation. The new government considering its populist inclination is likely to struggle with its objective of fiscal prudence.

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