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TFC's magic wand

The Thirteenth Finance Commission makes some radical—but highly desirable and doable—prescriptions.

Puja Mehra        Print Edition: January 24, 2010

At first, these seem to be too many tricks for even an expert magician to pull off in one show—an end to annual budget from 2013-14 and its replacement with a three-year rolling budget, revenue surplus for central government in just five years (its current revenue deficit is Rs 2,82,735 crore or 4.8 per cent of the GDP), a complete makeover of government assets portfolio and a greater scrutiny of the cost of tax compliance (knowing how much it costs the taxpayer to pay and the collector to collect new taxes). These are only some of the recommendations of the Thirteenth Finance Commission (TFC), which were submitted to the President on December 30 and will be tabled in Parliament during the Budget session starting in February.

Constituted roughly once every five years, the Finance Commission's key mandate is to suggest the basis for dividing tax revenues between the Centre and the states and also among the states. The past few commissions have gone beyond this key role and offered recommendations to improve the overall finances of the government. The TFC has made some far-reaching prescriptions that, if implemented, will not only vastly improve the finances of the government, but will also make it a smarter and more efficient entity—something that the modern Indian economy deserves.

Though the rest of the economy has transformed itself since 1991, that's not true of the government finances or the functioning of the Finance Ministry. Collectively, the TFC recommendations aim at delivering a public finance system that is in sync with today's economy. Imagine, for instance, the modern day India Inc. having to wait for all policy changes to take place only once in a year—on the budget day. Obviously it doesn't, so why carry on with the pretence of an annual budget anymore?

The Commission's prescriptions include an attack on two of the government's subsidies—petroleum and fertiliser that together account for Rs 53,089 crore (2009-10 budget estimates). The TFC says that a more accurate and efficient targeting of the two ever-growing subsidies—or replacing them altogether with cash transfers as is being examined in the Planning Commission—will take care of fiscal correction in the short-to-mediumterm.

That should be music to Finance Minister Pranab Mukherjee's ears, who is bracing up to announce a record fiscal deficit in the forthcoming Budget—courtesy the stimulus. For the long-term fiscal health, the government's asset portfolio must reflect its priority—development. For instance, the asset portfolio should show many more schools and healthcare centres in villages and fewer airlines, hotels or other businesses. By addressing these, the UPA can reduce the Centre and the states' combined debt-GDP ratio from 82 per cent to 65-70 per cent in five years—which is the FRBM (Fiscal Responsibility and Budget Management) target the TFC has laid down. Bulk of the work on this will have to be done by New Delhi as the states' debt-GDP ratio is at 26-28 per cent.

Specifically, the TFC has recommended creation of an inventory of all government-owned real estate with periodic reports to Parliament on its management and a list of PSUs yielding a rate of return below a certain level. It also wants an independent fiscal review/monitoring (of fiscal management) by a Council reporting to either the Cabinet or Parliament.

The TFC's magic pill for India's fiscal health would seem bitter only to the Finance Ministry. It entails a number of steps to inculcate discipline and keeping tabs on the fiscal situation. Most of these steps are for implementation from 2014-15 onwards. These include discontinuing with the current practice of annual Budgets in 2013-14 and moving to a three-year rolling mediumterm fiscal framework, mandatory disclosure of compliance costs at the time of changing tax policies and estimation of revenue Budget implications of all capital expenditure proposals (from 2011-12). To ensure that deviations by future Finance Ministers from the FRBM-mandated reductions in deficits don't take markets by surprise, it has recommended that advance disclosures be made of exogenous shocks, such as oil or food prices, which could impact FRBM targets adversely.

The Pay Commission awards must not be awarded retrospectively (goodbye to huge arrears for government employees) and disinvestment proceeds must go straight to the Consolidated Fund of India. Noting all these details, the recommendations look less like tricks and more like common sense measures to be implemented with a strong will—something the UPA government has just about begun to display.

The Key Suggestions

  • Move away from annual budgeting to three-year rolling fiscal framework from 2013-14.
  • Streamline just two subsidies. petroleum and fertiliser.to solve all fiscal woes.
  • Rebalance the government's asset portfolio to reflect development.
  • Mandatory disclosure of compliance costs at the time of changing tax policies.
  • No capital expenditure proposal without disclosure of revenue budget implications.
  • Independent fiscal review/monitoring by a Council reporting to either the Cabinet or Parliament.
  • Prior disclosure of exogenous shocks that could upset FRBM targets.
  • Constitution amendment for devolution of funds below the state government.

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