On May 7, 2003, India made another tryst with destiny, when the Lok Sabha passed the Fiscal Responsibility and Budget Management Act (FRBMA). Everyone is now anxiously watching how Union Finance Minister P. Chidambaram will redeem this pledge. By March 31, 2008, the revenue deficit — ie, the difference between revenue income and revenue expenditure of the government — has to be eliminated. India’s fiscal crisis is frightening. Every year, new borrowing is done to merely pay interest on old debt. Government liabilities have remorselessly inched up, and are a larger and larger fraction of GDP. Interest payments have inexorably become a bigger fraction of the total expenses. Out of the Rs 3 lakh crore of revenue expenditure budgeted for 2004-05, interest paymentalone accounted for Rs 1.3 lakh crore! The fiscal crisis has steadily tamped out the ability of government to spend effectively on public services. Holy cows like subsidies and various handout programmes have been enhanced by a Parliament focused on narrow political patronage, while the legitimate role of government in areas such as law and order and the judiciary have been crippled. India has a 20-year record of fiscal indiscipline. But then, for the first time in its history, Parliament put a constraint on the tax-and-spend game, and tied down the hands of the finance minister by enacting the FRBMA. All political parties voted in favour of the FRBM, and the UPA has reaffirmed its intent of meeting the goal. Last year, the revenue deficit of the Central Government was 3.6 per cent of GDP. Removing this requires a two-pronged attack. The first involves identifying subsidy and handout programmes, and eliminating them. A quarter of the ministries have nothing to do with the legitimate role of government and can be closed down, thus saving money. The second involves increasing taxes. This can be done without increasing rates, by removing exemptions, and broadening the tax base. The UPA does not have to face elections in the near future. So it makes sense to quickly announce major reforms. Within a few years, the economy will be reaping the fruits of such reform in terms of higher economic growth and this, in turn, would keep voters happy. This is, indeed, the defining principle by which Budget 2004 will be judged. How many subsidy programmes and ministries will be shut down? How many tax exemptions will be removed? Will P. Chidambaram set the course for the FRBM target, or will he be content to paddle along as his predecessors in North Block did in the preceding 20 budgets?
