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PMEAC for including expense targets in fiscal discipline

BS Reporter  |  New Delhi 

Says legislation be followed by medium-term framework

The Prime Minister’s Economic Advisory Council (PMEAC) has suggested that various government departments should be given expenditure targets as part of fiscal responsibility.

In its economic outlook for 2009-10, the council said fiscal responsibility legislation should be followed by a medium-term fiscal framework, specifying the targets on both revenue and expenditure sides.

“The experience with the Fiscal Responsibility and Budget Management Act (FRBMA) provides some useful lessons and the next stage of fiscal adjustment should be designed to incorporate them. Perhaps it may be possible to induct a counter-cyclical mechanism to the fiscal consolidation process,” it said.

It noted that fiscal discipline was not the function of the finance ministry alone and all spending departments should be involved in its implementation.

“Based on the medium-term fiscal framework, indicative expenditure targets should be given to each of the spending departments, based on which they should prepare a medium-term expenditure plan. Both the medium-term fiscal framework and expenditure plan should be initiated as a part of the FRBMA exercise to be updated every year,” it added.

After a steady improvement, particularly since legislating FRBMA in 2003-04, the fiscal situation deteriorated sharply in 2008-09 due to economic slowdown. The government is continuing its expansionary fiscal policy stance in the current year as well. It has provided additional cuts in excise duties and services taxes, besides increasing the borrowing room for states to 3.4 per cent of GDP.

The fiscal deficit at the Central level is estimated at 6.8 per cent and the consolidated deficit for the year is projected at 10.1 per cent. Finance Minister Pranab Mukherjee had indicated in his Budget speech for 2009-10 that the government planned to reduce the fiscal deficit by 1.5 per cent every year to 4 per cent by 2010-2011.

FRBMA required the government to bring down the fiscal deficit to 2.5 per cent of GDP by 2008-09. However, because of the steps taken by the government to stimulate the economy reeling under the impact of the global financial meltdown, the fiscal deficit soared to 6.2 per cent.

PMEAC Chairman C Rangarajan said he was comfortable with the FRBMA target but it was not possible to achieve it in the existing circumstances.

Atomic Energy Act
Meanwhile, the panel said it favoured amendment of the Atomic Energy Act to allow the entry of “reputable private companies” into nuclear power generation. The council is of the view that such a move will help in leveraging the India-US nuclear agreement.

It has called upon the government to take up an ambitious programme for capacity addition of 150,000 Mw in the nuclear power sector over the next 15 years. “Work on initiating the move towards a more aggressive path of capacity creation, particularly in respect of nuclear power, must start immediately,” said the PMEAC’s Economic Outlook for 2009-10.

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First Published: Fri, October 23 2009. 00:38 IST