The End of Accountability

The government wants to stop declaring its revenue deficit figures. This will make it less transparent–and less accountable to the people of India.

Upon my back to defend my belly, upon my wit to defend my wiles, upon my secrecy to defend my honesty.

The above words are uttered by Cressida in Shakespeare’s lesser known tragedy, Troilus and Cressida. While the unattractive lady utters these words in fear of history’s judgement of her ugliness, defending honesty by secrecy is a trait attributed to unscrupulous governments as well. This finance bill proposed cloaking the soaring revenue deficit figures, thereby absolving the government of its accountability from the next fiscal year. Such a practice, which conceals information from the public, sets a detrimental precedent.

Finance Minister Arun Jaitley has proposed amending the FRBM Act 2003, which is a part of the Finance Bill, to drop “achieving sufficient revenue surplus” from the long title of the act. Further, the government would no longer be liable to furnish “balance between revenue receipts and revenue expenditure” (revenue deficit) in the Medium Term Fiscal Policy Statement as was mandated previously under section 3(3)(i) of the Act. This is similar to Cressida’s words, although the government states that it wants to move away from revenue deficit management in its fiscal consolidation roadmap owing to an expected increase in revenue expenditures, due to increased health and education spending.

Why is overtly declaring revenue deficit so important? The fiscal expenditure of a government is broadly classified as ‘revenue’ and ‘capital’. While everything ‘capital’ deals with investing in assets yielding value in the future (like infrastructure), ‘revenue’ deals with managing a government’s day-to-day expenses (such as salaries and interest payments). Thus, a fiscal deficit slippage could be justified if the capital deficit is high, which indicates investment and a future return of multiplied value. Think about it, if a child borrows to buy a chocolate versus to pay for a bicycle to go to school day-after-day- what future would he/she have? Further, would such borrowing be justified?

The revenue deficit this fiscal is estimated to touch 2.6% of GDP as against the targeted 1.9%. Moreover, it was nearly 75% of the fiscal deficit and is estimated to be as high as 67% next year–indicating that the borrowing is to finance the government’s own housekeeping rather than improve the quality of revenue-generating assets. There was a fiscal slippage this year with the fiscal deficit target being revised to 3.2% of GDP, instead of 3% targeted earlier. Udayan Mukherjee wrote on how the government could increase its disinvestments and finance its deficits and future expenditures (like selling the state owned 9% stake in ITC for Rs 30,000 crore). This would have made for an important contribution to GoI’s receipts, in turn giving it room to borrow and increase capital expenditure. The revenue deficit could have been financed by such disinvestments–but sadly this wasn’t the case.

Had the revenue deficit been a couple of notches lower, the government may not have bothered to remove the revenue deficit target from the fiscal policy statements. Either way, this amendment is problematic at three levels.

The first problem is quite direct. When faced with a choice between policies for long-term economic growth and those for short-term appeasement of the masses, the government would be more tempted to choose the latter. To gain political advantage, governments would borrow to provide for subsidies and loan waivers–especially in election year budgets. This year is a testament to that with the national health protection scheme, the massive incentives given to agro-industries and so on. With a revenue deficit figure on the books, there is clear indication of the reasons for government borrowings, but without it, they could easily obfuscate the true intention of the announced schemes and cloak them under a garb of capital expenditure. Further, when the Government of India borrows to finance revenue deficit, future generations bear the cost without earning the benefit of such spending, thereby destabilizing the intergenerational sustainability of debt.

The second and bigger threat is promoting a culture of hiding the faults of a government from civil society. A legitimate worry is that the government will become covert about all other indicators and targets it sets for itself and fails to deliver on. They might continue to justify such moves by citing a grey area in the definition of the indicator and use this as a precedent for the same. Ideally, we would want a society with a government transparent about its operations. This move appears to be the very antithesis of that. A domino effect will kick in, normalising non-disclosure of other parameters too. This is a slippery slope, and an ironical one considering the government wants its citizens to declare everything that they own, buy, consume or possess.

The most worrying repercussion is the diminishing trust in the government–not as a political party or an individual, but as an institution. This lack of trust in turn leads to a lack of credibility at the centre, which further reduces the faculty of the government to dictate terms of development. One can argue that the experts will be able to calculate the revenue deficit figure–but it wouldn’t be the same as the government laying it out and formally acknowledging it. There might be different accounting measures for each expert, and thus debating their veracity would become the focus rather than the consequences of such figures. The government owes it to the market to standardize basic definitions. Certainly, by not revealing measures indicative of government performance, the prime minister would be losing control over the larger narrative. India is deemed “functional chaos” where systems and institutions are subservient to ‘jugaad’ and ‘deal-making’. While there is some truth to that, it is counter-productive to reinforce the sentiment through governmental action like this one.

History has it that the Chakravarthy Committee Report, which had taken the mantle of reforming financial institutions in 1985, suggested a change in status quo by revealing the fiscal deficit figure explicitly with other accounting indicators. Six years later, in 1991, under Manmohan Singh’s supervision, the fiscal deficit was reported for the first time. This government is trying to rewrite history, but in the wrong way. Instead of initiating reforms that the Congress was unable to deliver, the current government is trying to undo the ones they did.

About the author

Prakhar Misra

Prakhar Misra is an Associate with IDFC Institute, a political economy think/do tank in Mumbai. Previously, he was a Chevening Scholar reading for a Masters in Public Policy at the University of Oxford. He was also a Chanakya Scholar at the Meghnad Desai Academy of Economics from where he earned his post-graduation in Economics and Finance. He has been a fellow with Teach For India and with the Swaniti Initiative.