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December 3, 2007

Improving fiscal responsibility

Mukul G Asher

The central issue of quality of public finance policies and management is also equally crucial at the state and local levels. They should not feel complacent as their fiscal positions are even more vulnerable to slower growth and other exogenous factors. In particular, modern financial management practices, and focus on results need to be emphasised by them.

Many states have passed their own FRBM Acts. A better co-ordination between expenditure plans of the states negotiated with the Planning Commission and the FRBM targets of the States is required.

For the municipalities and other urban bodies, such reforms will be essential to access financial and capital markets (e.g. through securitisation of property tax revenues) to finance capital expenditure. By 2030, about 45 percent of India’s population, numbering about 625 million people will be living in urban areas and their periphery. Given the general neglect of the urban bodies, institutional and organisational fiscal reform is considerably overdue and urgent. Isolated attempts at budget reforms, such as in Ahmedabad and Bangalore are encouraging, but insufficient. The aim must be to develop an active municipal bond market by about 2015.

To ensure a sustainable medium-term fiscal framework, the finance minister should explicitly recognise the need for better fiscal institutions and organisational arrangements, and propose specific measures in his February 2008 Budget speech. This would help ease a major constraint in securing India’s economic future. The linkage between municipal fiscal management by the centre, the states and the electoral outcomes needs to be made stronger. There is no substitute for competence in governance and in government.


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