Some proposals in the first part of the Budget Session
The Budget Session of Parliament started on 12 March with the President’s Address. During the first part of the session, Parliament’s focus has been on this address and the Railways and Union Budgets. In addition, some key motions have been proposed by some members to annul and modify some Rules issued under the Information Technology Act, 2000 and the Civil Liability for Nuclear Damage Act, 2010. Parliament will take a three week break in April to examine budgetary demand for grants. In the second part, between April 24 and May 22, the Finance Bill and expenditure proposals of the Union Budget will be considered. The government has also listed 39 other Bills for consideration and passing during the session.
In this note, we examine a significant change proposed in the Finance Bill that would allow a higher level of revenue deficit. We also discuss the two motions that amend the Rules mentioned above.
The Finance Bill, presented as part of the Union Budget, has a section to amend the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). That Act was passed to keep spendthrift governments in check. Governments may believe that short term spending funded by borrowings can help them win elections; however, these often lead to increase in public debt and debt servicing costs. The FRBM Act attempted to curb this tendency by requiring the government to bring revenue deficit to zero within five years, and the fiscal deficit to be reduced to a level determined by Rules. The FRBM Rules, 2004 set the five-year target for fiscal deficit to 3% of GDP, with a decrease every year in the interim. However, both these targets were not met. (Though government accounts indicate that the interim targets were met, these figures do not account for oil, food and fertiliser bonds.) Since 2008, the targets were suspended as a stimulus measure in the wake of the global financial crisis.
Last year, the finance minister introduced the concept of “effective revenue deficit”. This deficit is calculated by subtracting capital grant by central government to states from the revenue deficit. The justification given is that these grants are used for building capital assets, so they should not count as revenue expenditure. However, the catch would lie in the details: would items such as central grant to states for MGNREGA be counted as a capital grant or a revenue expenditure?
In this budget, the FRBM targets have been revised. The new targets require the effective revenue deficit to be brought to zero by March 2015, and the revenue deficit to be contained at 2% of GDP by that date. In effect, the target for revenue deficit has been eased by 2% of GDP. The new fiscal deficit targets will be issued in the Rules; if there is no change, then the implication is that direct capital expenditure by the centre (net of PSU disinvestments and loan recovery) will be restricted to 1% of GDP. If the fiscal deficit target is also eased in the Rules, that would have adverse implication for both medium term growth and inflation.
Oversight of subordinate legislation: Two pending motions
The Civil Liability for Nuclear Damage Act was passed in 2010. This Act limited the civil liability of any nuclear operator in the event of an incident to Rs 1500 crore. The Act also provides the operator with the right to recourse under three conditions. These include (a) if there is a contract providing such right; (b) if the incident is due to a patent or latent defect in equipment or material supplied; or (c) the nuclear incident was deliberately caused. The government has notified Rules under this Act. Among other things, these Rules specify minimum standards for a contract (under case (a) above). The Rules require the contract to provide that the right of recourse should not be “less than the extent of the operator’s liability … or the value of the contract itself, whichever is less”. They also provide that the duration of the contract shall be for the duration of initial licence issued under the Atomic Energy (Radiation Protection) Rules, 2004 or the product liability period, whichever is longer.
These Rules raise the following issues. First, it is not clear whether these Rules would override the right of the operator to recourse under the second condition above. That is, whether the existence of a contract that provides for recourse would override the right to recourse for in case of an incident caused by patent and latent defects. Second, the term “value of the contract” is not defined. It could mean the consideration for purchasing a component or the amount mentioned in the contract as the supplier’s liability. Third, the term “initial licence” is not defined. If we assume that this term refers to the first time, the licence is given under the 2004 Rules, then the period is for the first five years of operation of the nuclear plant. This period would be redundant if an equipment is purchased during a later period (when the plant is operating under a renewal of the first licence).
A motion to amend these Rules has been proposed by Sitaram Yechury in Rajya Sabha. This motion proposes that the Rules be modified to remove the term “value of contract”. That would limit the right to recourse to the operator’s liability. The motion also proposes to replace the term “initial licence” by “30 years”.
It would be interesting to follow the debate on these two motions and see whether Parliament amends the Rules.
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