Dialogue  April - June, 2004 , Volume 5  No. 4

Good Governance in Assam: the Need for Fiscal Responsibility

     Legislation

H.N. Das

It was in 1991-92 that the Reserve Bank of India (RBI) made the suggestions that “there is need for a law restricting the extent to which the Centre can run a deficit and that “there should be a legal ban on the government borrowing from all sources beyond a certain ceiling with a sub-ceiling on borrowing from the Reserve Bank of India.” It was thought that such legal enactments would “ensure that the monetised deficit does not have deleterious effects on the economy.”1 

In a leaned paper on this subject Dr. Y.V. Reddy, the present Governor of RBI, observed that “a legislation on fiscal responsibility may have to focus on a medium term framework in addition to annual budget, methods of promoting prudent fiscal behaviour, enhancing transparency in all government policies having a bearing on fiscal management and finally accountability. Further, such legislation should address the core issues of enhancing fiscal efficiency in terms of resource mobilisation and allocation of expenditures.”2 

Since then Fiscal responsibility (FR) legislations have been passed by the Central Government (August 2003) and four State Governments, namely, Karnataka (2002), Punjab (2003), Tamil Nadu (2003) and Kerala (2003). In quite a number of other countries fiscal rules have been adopted in order to bring about fiscal stability. These include the USA, Japan, Sweden, New Zealand, Canada and the European Union countries. A few emerging economies also started adopting some such fiscal rules. But countries like Argentina, Colombia and Brazil seem to already have had many instances of non compliance with these rules.

The objective laid down in the Government of India (GOI)’s Act is “to provide for the responsibility of the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economic stability by achieving sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government and conducting fiscal policy in a medium-term framework and for matters connected therewith or incidental thereto.”3  This is quite a lofty objective. Only the future working of the Act will show how much of it has been achieved and how far it is considered to be attainable by the executive government, the legislators and the civil society generally. The objective laid down in each of the state legislation is similar.

 The need for such legislation, although not exactly with the same coverage, has been talked about ever since the time when the Indian Constitution was framed. Dr. Ambedkar himself underscored this during the debate in the Constituent Assembly on articles 292 and 293 when he hoped that “parliament will take this matter seriously and keep on enacting laws so as to limit the borrowing authority of the union.”4  The present legislations go much further than mere fixing of debt-ceiling which happened to be the main concern more than half a century ago.

In the recent past the problem became much more acute with both GOI and the State Governments running into huge deficits totaling more than 10 per cent of India’s GDP. This alarmed a cross section of people and the demand for proper control became quite vociferous. To illustrate the point it may be stated that in GOI’s Budget for 2004-05, on which a vote-on-account was taken recently, it is proposed to meet the total expenditure of Rs. 4,57,434 crores by a fiscal deficit of the magnitude of as much as Rs. 1,36,452 crores. This is 4.4 percent of India’s GDP. In the previous year, that is, 2003-04, the fiscal deficit in the budget was 5.6 per cent of GDP.

As far as the states are concerned their annual deficits have been rising ever since the mid eightees of the last century. Today the situation seems to have become almost unsustainable. A few years ago RBI summed up the situation in the following words: “The fiscal health of States has been under severe stress in recent years, as evidenced by the rising deficits and the compression of development expenditure. Revenue deficits, which emerged since the mid eightees, have led to diversion of part of the capital receipts towards current expenditures. Consequently, the internal debt and debt servicing burden of the State Governments have increased.”5  In the year 1998-1999 the fiscal deficit of all the states was estimated at 3.6 percent of India’s GDP. In 1999-2000 it rose to 4.7 percent before falling to 4.4 percent in 2000-01.

As observed by RBI “the expenditure overrun stems largely from the persistent rise in non-plan revenue expenditure. This segment of expenditure (mainly comprising interest payments, administrative services and pension outgo) accounts for a major portion of non-plan revenue expenditure and together absorbs a sizeable portion of revenue receipts, revealing the continued use of borrowed funds to fill up the revenue gap.”6  

The Economic Survey for 2002-03 had noted that inspite of “Fiscal Responsibility legislation and medium term fiscal reform programme the pressure on the fiscal front continues.” This has happened because of the lack of fiscal consolidation at the state level as also in the Centre. The combined fiscal deficit of the centre and the states together climbed to as high a figure as 10 percent of GDP during 2001-02. The Survey, therefore bemoaned the fact that “the high fiscal deficit continues to complicate the task of conducting counter-cyclical policies and augmenting outlays on the much needed social and physical infrastructure and poverty alleviation programmes,”7 

In Assam serious steps to initiate integrated fiscal reforms are yet to be taken although certain ad-hoc measures have been announced from time to time. The cash-strapped state has been facing an acute financial crisis and is practically living from hand to mouth ever since the middle of the nineteen nineties. Probably the Government of Assam (GOA) recoiled from harsh measures due to political compulsions. It is more likely that they did not realise that it was a structural imbalance that they were up against and that it could not be corrected by ad-hoc and temporary measures. The situation became worse towards the end of the last century. Inspite of that the then ruling party-Assam Gana Parishad – did not take any unpleasant steps probably because they feared that this might adversely affect their votes in the then ensuing general election which was held in May 2001. However, when the mounting overdrafts made it practically impossible to disburse salaries in time they had to sign a “Summary record of discussion” with GOI on November 18, 1999. This has been called the “fiscal reforms programme” or the “Memorandum of Understanding” (MOU). Another such MOU was signed on March 26, 2003 called the “Medium Term Fiscal Reform Programme, 2000-01 to 2004-05.” (MTFRP)

Earlier, in December, 2001, the Committee on Fiscal Reform (COFR) had submitted a detailed report with a large number of recommendations.8  but no serious attempts seem to have been made to implement these although GOA accepted the recommendations. In this GOA is not alone. GOI also did not implement their Expenditure Control Commission Recommendations. It will be good if the provisions of the March, 2003 MOU at least are fully implemented by GOA in a time-bound manner. This MOU has listed the following as the benefits which will flow if it is implemented:

(i)   Restoration of the State’s financial health.

(ii)  Improved governance and service delivery.

(iii) Higher levels of investment , and

(iv) Higher economic growth, reduced poverty and improved social indicators.

It has to be appreciated that the present Congress Government in Assam inherited the financial crisis from its predecessors. It is also true that the present government alone will incur wrath and antagonism of the affected sections when it tries to implement the harsh measures recommended in the COFR Report and in the MOU. But similar decisions have been already taken by the enlightened state governments of Maharashtra, Orissa, Madhya Pradesh and Kerala in recent months. In Kerala the Chief Minister stood almost alone in putting down employee resistence to reform. But he succeeded. While starting fiscal reform if GOA can once get over the initial pangs it will be able to come out of its present predicaments of minus bank balances and closed treasuries and run the administration more freely and better.

Coming back to FR legislation GOA has yet to take action for passage of such an Act. Meanwhile, RBI has prepared and circulated a model Act which GOA will most probably consider for adoption. This model is quite elaborate and the various provisions have been explained in detail in the introductory sections of the document. In GOA’s Memorandum to the Twelfth Finance Commission and in the Assam Chief Minister’s speech on that occasion quite considerable emphasis has been laid on MTFRP. But nothing at all has been mentioned about any FR legislation for the state. This is rather surprising.9 

It is felt, however, that in any FR legislation for Assam the ground realities of the state should be kept in view so that it can balance the need for fiscal control on one hand and flexibility for economic development on the other. A tentative and random overview of the situation would indicate that for this purpose the following facts need careful examination:

a)  The tremendous increase of expenditure on salaries, wages ands pension.

This has to be curtailed.

b)  Security related expenditure due mainly to insurgency. Full reimbursement from GOI should be obtained.

c)  Grants to NGOs and autonomous institutions. These need very close scrutiny.

d)  Continuing loss by PSUs and erosion of their capital base. This must be halted.

e)  The problem of burgeoning Public debt and Contingent Liabilities. The problem has to be tackled urgently. Fresh public debt should not be allowed to be contracted to meet revenue deficit.

f)   The present practice of obtaining 100 per cent loan for flood control measures. This should be re-examined. Since such loans are not creating any remunerative assets, in most cases, GOI should be approached for 90 per cent grant and 10 per cent loan.

g)  Natural disasters have increased in number and intensity requiring ever increasing expenditure. GOI should re-imburse such expenditure in full.

h)  Beside the existing District Councils and the newly created Bodoland Territorial Council under the Sixth Schedule of the Constitution there are several statutory bodies for different tribes. Expenditure on all these have become political compulsions. GOI have to help GOA in this regard.

i)   The failure to increase revenue commensurate with expenditure. This has plagued development efforts in the past to a great extent. Measures, as have been recommended by COFR, should be adopted immediately.

j)   Concerted move need to be taken to increase the devolution of resources under the dispensation of the Finance Commission. The memorandum submitted by GOA to the Twelfth Finance Commission need to be followed up.

k)  Revenue leakages in check gates, tax offices and business establishment must be completely stopped.

l)   Diversion of funds from Plan to non-Plan side of the Budget must not be allowed.

At first sight all of these may not appear to be relevant. Each one will, therefore, need deeper scrutiny. But the fact that all of them are contributing to the present fiscal ill health would warrant further examination with a view to evolve a workable basis for a FR legislation.

A few of the items listed above need special attention. The present practice of diversion of plan funds, proceeds of market borrowings, small savings and provident fund for payment of salaries inhabits proper utilisation of plan funds for development projects, schemes and projects. What is more unfortunate is the fact that no one seems to realise or care that such diverted funds are not coming as a largesse and that these have to be refunded in full with interest. This extra expenditure actually get converted into public debt thus swelling the quantum of burden transferred to the future generations. Moreover, this practice has corroded the efficiency of administration by making GOA run from crisis to crisis. No doubt that Assam is sliding down against all India averages in the comparative indexes of per capita income and of human development.1 0 The number of people below the poverty line (BPL) are increasing both in the rural and in the urban areas. The percentage (36) is also high against the all India average (26). The position in regard to most of the constituents of the human development index is rather poor.1 1

In the past Assam has lost central assistance due to the political executive’s failure to carry out certain reforms or provide matching contributions on many occasions. In one case Assam lost Rs. 182.96 crores (probably more) due to the Assam Gana Parishad Government’s failure to hold Panchayat elections and transfer powers to the elected bodies in contravention of the 73rd amendment of the Indian Constitution.1 2 But who lost? It was the BPL population who were punished. And not the politicians who perpetrated the contravention.

Another area is that of the recent spurt of expenditure on the eve of parliamentary elections. It is noticed that GOI has been releasing advertisements in the electronic and the print media regarding the progress made by India during the incumbency of the present BJP government. These have been published under the banner of “shining India” costing probably more than Rs. 250 crores. A host of concessions including tax reliefs and popular schemes have also been announced costing several thousand crores more. In Assam, following GOI, GOA have issued similar advertisements and have also taken up popular schemes. This has been clearly done to attract votes for Congress candidates in the ensuing parliamentary elections. The cost must have been huge. Such election eve expenditures on sops etc. have very bad effect on the economy. In the FR legislation of Punjab provision has been made to ban such sops six months ahead of the lections. How and in what manner this type of infructuous expenditure can be prohibited needs very thorough examination.

In regard to contingent liability there are different ways in which these are contracted including guarantees, PLA accounts, revenue deposit etc. In Assam the guarantees given to banks against loans to the surrendered United Liberation Front of Assam (SULFA) have caused concern. Many ways have also been evolved to subvert the legislative ceilings fixed in this behalf. Such loopholes need to be plugged.

There is no penal provision in the FR legislations adopted so far. Without such provision the legislations have no teeth. Moreover, any such penal provision will have to be uniformly applied all over India to be effective. These should target the political functionaries and should not affect the general public in the state.

The drafting of FR legislation will need very careful and detailed study. At the core of such a legislation will be three broad fiscal rules – deficit, debt and borrowings. But its contours will encompass many other dimensions including budget management, MTFRP and fiscal transparency. All this will have to be worked out. An examination of the existing legislations and the ground situation seem to suggest that it would be better if one Central legislation covered the entire country including the states. But can such a legislation take into account all the special circumstances of each of the states? An answer to this question holds the key to the solution.

Reference:

 1.  Reserve Bank of India Annual Report. 1991-92. Mumbai.

  2 . Dr. Y.V. Reddy “Legislation on Fiscal. Responsibility and Reserve Bank’s Role: Some Issues”.

Reserve Bank of India Bulletin. March, 2000, Mumbai.

  3.  The Gazette of India. Extraordinary. Part II, Section 1. New Delhi, August 26, 2003.

4.  Dr. Y.V. Reddy. Ibid.

5.  Reserve Bank of India Bulletin. February, 1999. Supplement: Finances of the State Governments: 1998-99. Mumbai.

6.  Reserve Bank of India Bulletin. October, 2001. “Finances of the State Governments: 2001-02. A Summary of Major Features.” Mumbai.

7.  Government of India. Ministry of Finance and Company Affairs. Economic Division. The Economic Survey 2003-2004. New Delhi, February, 2003.

8.  Committee on Fiscal Reform. Government of Assam. Guwahati December 7, 2001. (Chairman: H.N. Das).

9.  Government of Assam. Memorandum to the Twelfth Finance Commission. Dispur, January, 2004.

10.The fact that Assam’s per capita income was higher than the national average before 1950 and that it has slipped down substantially since then was first brought out, after detailed research, in H.N. Das. “A New Paradigm of Development: Regional Imbalance and Assam.” The Economic Times. October 23, 1985.

11. Government of Assam, Assam Human Development report, 2003, Guwahati, February, 2004.

12. This amount is as calculated by COFR in its report. There are many such instances. Beside COFR Report the following is also relevant. H.N. Das. “Where Has the Money Gone?” The Assam Tribune, May 6, 2003.