The Hindu Business Line : Fiscal responsibility Bill -- Deficit limits to stay, but with changes

THE Finance Ministry is set to retain numerical ceilings on deficits in the proposed amendments to Fiscal Responsibility and Budget Management Bill (FRBM), adhering to its commitment of undertaking fiscal restructuring.

The ceilings on fiscal and revenue deficits may be incorporated in the rules rather than the legislation per se, according to a top Finance Ministry official.

When the FRBM Bill was introduced in 2000, the Government had proposed a reduction in the fiscal deficit by half-a-per cent of the GDP annually and the elimination of the revenue deficit by the end of five years.

With the Parliament's Standing Committee on Finance opposing most of the key provisions of the Bill in its report, the Government will shortly take a view on the level of numerical ceilings on deficits to be incorporated afresh.

At the same time, however, the Ministry is likely to propose greater flexibility in the clause, which provides the Government the leeway to breach the mandated ceilings in the event of a national calamity or a threat to national security.

``The Finance Ministry will attempt to reconcile the basic objective of the FRBM Bill as stipulated in the original clauses of the proposed legislation with the recommendations given by the standing committee'', said the official.

The clauses in the Bill, on which the committee wanted the axe to be wielded, included the one specifying the levels of revenue and fiscal deficit and the time-frame of five years set for it as well as the blanket ban on borrowings by the Government from the RBI through subscriptions to primary issues by the Government.

The FRBM Bill had also sought to restrict guarantees to one-and-a-half per cent of the estimated gross domestic product (GDP) in any financial year. The Bill had also proposed that the total liabilities (including external debt at current exchange rate) at the end of a financial year should not exceed 50 per cent of the GDP for that year.

These provisions are crucial to achieving the goal of long-term macro-economic stability in the viewpoint of the Government and the RBI. Accepting the recommendations of the standing committee will mean a major watering down of the provisions of the Bill.

The committee's justification for scrapping the numerical ceilings on deficit and the time-frame was that it would induce excessive rigidity into decision-making. Thus, the Government would be deprived of the flexibility to respond to exigencies in an appropriate manner and to serve the national interest.

The proposed blanket ban on direct borrowings from the RBI outlined in the Bill did not find favour with the Parliamentary panel as it reckoned that such a ban could lead to higher market borrowings by the Government in the event of any failure to achieve the mandated fiscal deficit reduction targets.

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Fiscal responsibility Bill -- Deficit limits to stay, but with changes