The Hindu Business Line : `Review approach to Fiscal Responsibility Act'

Awaiting solution Budgetary expenditures on social sectors to be treated as revenue expenses. Viability gap financing is another area of concern.

New Delhi , Nov. 25

The Planning Commission has made out a case for redefining the current approach to the Fiscal Responsibility and Budget Management (FRBM) Act's inclusion of revenue deficit target reductions since it might restrain Government spending on welfare programmes dear to the UPA Government.

Sources in the Government told Business Line here that after "widespread consultations" with all the State Governments and Union Territories, the final report of the Approach Paper to the 11th Five-Year Plan (2007-12) is understood to have conceded "a special problem" posed by the FRBM that relates to the achievement of the revenue deficit targets specified in the Central and also in various State legislations.

NDC meeting

The Approach Paper would be discussed threadbare at a meeting of the National Development Council scheduled on December 9here with the State Chief Ministers and Union Territory governments.

The shift in Plan expenditure towards the social sectors has meant that a large proportion of the expenditure undertaken would be revenue expenditure as per the budgetary definition.

According to this, all grants by one tier of Government to another or to the private sector are treated as revenue expenditures, regardless of whether such expenditures create assets or not.

This meant, "we could face a situation where the fiscal deficit targets are met but the revenue deficit targets are not because of the high revenue component of Plan expenditure," the Plan panel said.

Illustrating this point, it said the entire budgetary expenditures on Bharat Nirman, the National Employment Guarantee, the Backward Regions Grant Fund, the Jawaharlal Nehru 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.

A similar problem emanates with viability gap financing which is also a grant clearly linked to investment under public-private partnership but which appears as revenue expenditure in the budget.

The sources said these problems suggest in unmistakable measure that even if the fiscal deficit targets are met, it might not be easy for the Centre to chop the revenue deficit from 2.1 per cent of the GDP in 2006-07 to nil by 2008-09, while simultaneously scoring substantial increases in Plan expenditure with a hefty revenue component.

Vision of approach

Without mincing words, the Plan panel bluntly warns that the very vision of the approach to the 11th Plan, which entails mixing innovative financing of infrastructure with a massive decentralised thrust on education, health and agriculture, might be "defeated if the FRBM discipline is insisted upon with the current definition of revenue deficit".

However, the Plan panel notes that though the States currently do not confront this problem to the same extent as the Centre, restrictions on the size of the revenue deficit will limit the extent and pace of devolution to the Panchayati Raj Institutions and Urban Local Bodies which would impart a setback to the strategic approach being advocated in the Approach Paper.

Exploring other options to obviate this did not commend themselves to any solution, the Plan panel conceded. "The only way of meeting the revenue deficit targets of the FRBM as they stand at present is to adjust the time-phasing of those programmes which are revenue-expenditure intensive".

But as this would entail precisely the programmes focusing on social inclusiveness, it might not be easy to execute unless non-Plan revenue expenditure, mainly subsidies, is drastically whittled down.

This raises the issue of whether the inclusion of revenue deficit target in the legislations needs to be reviewed, it said adding that there is a case for redefining our approach to FRBM.