FRBM Act 2005 has the objective of ensuring prudence in fiscal management by eliminating revenue deficit, reducing fiscal deficit, establishing improved debt management and improving transparency in a medium term framework with quantitative targets to be adhered by the state with regard to deficit measures and debt management. The Act also stipulates that the state should build up adequate surplus (after elimination of deficit in the revenue account), which is to be utilized for discharging liabilities or for funding capital expenditure.
The other major fiscal management objective of the Act is to lay down norms for prioritization of capital expenditure, and pursue expenditure policies that would provide impetus for economic growth, poverty reduction and improvement in human welfare. The state is also required to pursue policies to raise non-tax revenue with due regard to cost recovery and equity.
The fiscal management principles enshrined in the Act call upon the state government to ensure transparency in setting and implementation of fiscal policy, stability and predictability in policy making process, improve responsibility the management of public finance and ensure intergenerational fairness, and improve efficiency in the design and implementation of fiscal policy related to management of assets and liabilities.
As per the FRBM Act 2005, the total debt including contingent liabilities, should not exceed 28 per cent of the estimated Gross State Domestic Product (GSDP) for the year. The State’s total liability including guarantees and letter of comfort during 2009-10 was Rs 49,829 crore, which was 24 per cent of the GSDP which was well within the parameters of the FRBM Act 2005. However, it was higher than that projected in the Medium Term Fiscal Policy Statements for subsequent years.
Increase in the revenue deficit indicates that some portion of the high cost borrowings are being used by the Government for meeting its current expenditures.
According to Amendments (31 March 2012) in the Fiscal Responsibility and Budget Management Acts - Deficit and Debt Targets, the state of Haryana was to attain zero revenue deficit by 2011- 2012 and maintain till 2014-15. Achieve fiscal deficit 3 per cent of GSDP from 2010-11 and maintain the same till 2014-15. Outstanding debt as percentage of GSDP shall be 22.4 per cent (2010-11), 22.6 per cent (2011-12), 22.7 per cent (2012-13), 22.8 per cent (2013-14) and 22.9 per cent (2014-15).
It hardly needs any justification that fiscal policy influences the economic performance of Haryana in many ways. It is necessary for creating efficient, sufficient and equitable infrastructure in the entire State, which ensure generalized externalities and provide a competitive environment for the private enterprises.
The performance of the state in terms of fulfilling the targets set under the FRBM Act looks encouraging. It is to be noted that the fiscal situation in Haryana has improved significantly by the time the state enacted the FRBM Act. The state was able to generate surplus in the revenue account and reduce the fiscal deficit to a mere 0.27 percent relative to GSDP in 2005-06, the year when the FRBM Act was enacted.
The improvement in revenue performance and strict expenditure control are the key to the overall improvement in fiscal situation in the state. Haryana is the higher per capita Income State in India. Per capita income has improved after FRBM Act in Haryana. The revenue deficit of Haryana showed surplus up to 2007-08 but after world economic crises and Sixth Pay Commission recommendation there has negative trend of revenue deficit.
This has resulted in substantial decline in debt GSDP ratio. While the state is well on course with regard to fiscal targets of the FRBM Act, the fiscal management should continuously provide impetus to growth, poverty reduction and social welfare through appropriate policy interventions.
The number of measures in compliance of Fiscal Responsibility & Budget Management Act, 2005 spelt out by the Haryana Finance Minister in his Budget speech 2006-07 as composite strategy of revenue augmentation, expenditure curtailment and debt management were necessary to bring operational efficiency, transparency in the State fiscal operations.
The scope for expanding government expenditure in priority sectors are clearly missed on the face of overwhelming improvements. The revenue deficit touched as low as 1 percent relative to GSDP in 2000-01 and remained at very low level before turning surplus in 2005-06. Similarly the fiscal deficit has remained around one percent of GSDP since 2004-05. While revenue performance of the state has increased significantly, the expenditures both in revenue and capital account were squeezed.
To achieve balanced growth with equity and social justice, the allocations of resources in different sectors of the Haryana economy under plan deserve proper monitoring and evaluation by unbiased academicians. There is a strong case for constituting State Economic Council on the national pattern for using the best brains available in Haryana for operational efficiency of the State economy.
To implement FRBM Act, it will be relevant to adopt the canons of public expenditure given by Dr. B.R. Ambedkar in terms of the faithfulness to the intentions of the will of the people, wisdom as provided by the professionals in the field, coupled with well-considered and honest judgment, and economy in execution. The allocation of public expenditure among competing demands and the manner of utilization fall within the domain of Ambedkar’s canons, which can be seen as a touch-stone to see whether a particular items of public spending is necessary or not.
To review, monitor and evaluate the compliance of FRBM Act 2005 in a continuous manner, there is a strong case for a State level Institute to be called ‘Haryana Institute of Public Finance and policy (HIPFP) on the pattern of National Institute of Public Finance and Policy (NIPFP) in Delhi. Let the state become first in doing so as in formulation and implementation of FRBM Act.
About the Author: The writer is Professor of Economics & Dean, Faculty of Social Sciences, Kurukshetra University, Haryana.