A Tale of Two Notifications
26th 2004, Jayati Ghosh
the UPA government assumed office, there were two
important bills which had been passed by Parliament,
which were pending notification. These bills were
very different in nature. One is inherently democratic
and progressive, the other essentially rigid and anti-democratic
in its implications. So far, only one of these has
actually been notified by the government, and the
choice of the more undemocratic bill sends out very
unfortunate signals about the goals and priorities
of the new government.
The first - the Right to Information
Act - is a bill designed to strengthen and deepen
the democratic process, and is itself the outcome
of a prolonged struggle by people’s movements and
civil society organisations. It would enable much
greater access to important information by the ordinary
citizens about a wide range of government activities
at all levels, and would therefore not only lead to
greater accountability but also reduce possibilities
of corruption and unfair granting of favours or harassment.
However, until the last week of July this bill had
not yet been notified, which effectively means that
it has not yet passed into law and therefore cannot
be implemented. The causes for delay in notifying
this bill are not evident, since there are no legal
hurdles to be cleared. The fact that the government
has not done so in all these weeks, despite continuing
popular pressure and representations by prominent
citizens, suggests that freedom of information for
the ordinary citizen is not being treated as a priority.
This sluggishness is in sharp contrast to the alacrity
with which the second bill was notified by the new
government. One of the first undertakings of the UPA
government - and indeed its first legislative action
- was to notify the second bill -act was notified
on 2 July to come into force on 5 July 2004, the Fiscal
Responsibility and Budget Management Act (henceforth
FRBM Act). This only three days before the presentation
of the Annual Budget, thereby making circumscribing
the entire budgetary exercise from the start of the
new government’s tenure.
The FRBM Act is apparently well-intentioned, designed
to clean up public finances and put them on a sustainable
footing. Thus, it requires the reduction of the fiscal
deficit and the elimination of the revenue deficit
of the Central Government by 31 March 2008 (the deadline
is to be extended by a year). This would appear to
be a way of forcing the government to adhere to a
discipline which would thereby allow it to spend more
on useful capital expenditure.
However, the actual implications of the working of
the Act are much more serious and potentially adverse,
than is generally understood. The Act requires the
Central Government to reduce the fiscal deficit by
0.3 per cent of GDP each year, and the revenue deficit
by 0.5 per cent each year, beginning with this financial
year. If this is not achieved through higher tax revenues,
the necessary adjustment has to be made by cutting
Further, the Act prohibits the Central Government
from borrowing from the Reserve Bank of India (that
is deficit financing, involving the printing of money)
to meet its deficit, except for temporary cash advances.
This effectively rules out a cheap source of borrowing
and forces the government to borrow at much higher
rates, for no evident reason.
The argument that deficit financing causes inflation
is not just simply wrong. It is now widely acknowledged
across the world to be ridiculous and completely unwarranted,
especially in the financially sophisticated world
we live in. So inflation control does not at all depend
upon controlling the central government’s borrowing
directly from the RBI.
So this directive does not serve any useful purpose.
Instead, it unnecessarily forces the government to
pay much higher interest on all its debt, instead
of allowing for some low interest debt to the RBI.
This raises the interest cost of the government and
thereby the total revenue expenditure, perversely
making it harder to achieve the revenue deficit targets.
It is hard to understand why this portion of the Act
has been retained even when earlier discussion in
Parliament pointed to the absurdity of this condition,
But the most worrying - and potentially undemocratic
- part of the FRBM Act relates to compliance conditions.
The Act states that ''whenever there is a shortfall
in revenue or excess of expenditure over the pre-specified
levels….the Central Government shall take appropriate
measures for increasing revenue or for reducing the
expenditure (including curtailing of the sums authorised
to be paid and applied for from and out of the Consolidated
Fund of India under any Act so as to provide for appropriation
of such sums).''
The notification spells this out even more clearly:
''In case the outcome of the quarterly review of trend
in receipts and expenditure…at the end of any financial
year… shows that
total non-debt receipts are less than 40 per cent
pf the Budget Estimates for that year; or
fiscal deficit is higher than 45 per cent of the Budget
Estimates for that year; or
revenue deficit is higher than 45 per cent of the
Budget Estimates for that year,
the Central Government shall take appropriate corrective
This means that if any of these conditions holds (which
is very likely in most years) the government will
in effect be forced to cut expenditures even if they
are essential for the economy, or required to enforce
its popular mandate or to deliver the socio-economic
rights of the citizens.
This is going to hit home much faster than many people
realise. The Budget 2004-05 contains what are widely
recognised to be inflated and highly optimistic revenue
receipt projections. Also, the overwhelming part of
additional resource mobilisation in the budget is
backloaded, to be available only after September.
In addition, the truant monsoon is bound to depress
revenues. By September, it is not just likely but
almost inevitable that the actual revenue receipts
will fall short of the Budget estimates by 40 per
cent or more.
When that happens, by the Act that the government
has just notified, it will then be required to cut
back on expenditure. This means that even the low
and inadequate provisions for employment, education
and other goals listed in the National Common Minimum
Programme will be further cut, and may not even increase
Much of the opposition to the expenditures projected
in the Budget has focussed on the low additional outlays
for critical and socially necessary areas, which has
been seen as a betrayal of the people’s mandate. The
total budgeted for these is only Rs. 10,000 crores,
but imagine the situation if even this small additional
outlay is not actually provided, because of the constraint
posed by the FRBM Act!
There may be even worse to come. The fearsome combination
of heavy floods and severe drought that is affecting
different parts of the country is bound to involve
lower incomes and thus lower tax collections, as already
stated. But it should also require much larger outlays
to provide even the most minimal relief to the affected
people who are spread across India. Even such critical
relief and rehabilitation - including in the form
of rural employment and other physical assistance
- may be under threat from the absurdly rigid fiscal
discipline imposed by the Act.
The problems with such fiscal responsibility legislation
across the world are now becoming more and more evident.
The Gramm-Rudman-Hollings legislation in the US, which
was the international front runner in this regard,
is now really honoured only in the breach, through
shifting many expenditures of the US federal government
to off-budget heads. In the European Union, the Growth
and Stability Pact which provides similar constraints
is coming under severe pressure, and France and Germany
are already seeking ways to make it effectively meaningless
and inapplicable to actual fiscal policy.
Clearly, therefore, this is not just a foolish piece
of legislation but also fundamentally undemocratic
and possibly even unconstitutional. The new government
should without delay enter into a reconsideration
of this Act, with a view to repealing it, if it is
to remain responsive and accountable to its citizenry,
rather than following the dictates of the highly dubious
economic logic favoured by international investors.
There is, of course, another (more sordid) way of
dealing with this mess. Instead of recognising the
wrongheaded nature of this legislation, the government
could simply choose to live with it and try to circumvent
it through ''creative accounting'' - or more crudely,
fixing the books. While this may turn out to be better
for the people than actually enforcing expenditure
cuts, it is certainly undesirable because it promotes
even more lack of transparency within the government,
and less open accountability to the people. It is
quite well recognised that such off-budget padding
is not only less accessible to final recipients but
also fiscally inefficient.
But come to think of it, such book-fixing and creative
accounting is feasible only if the books can be kept
reasonably secret and not open to public scrutiny.
So maybe this is the real reason why the Right to
Information Act is still not being notified….