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Fiscal Transparency

What one expected from the Report of the Advisory Group set up by the Reserve Bank of India (RORB) to assess conformity to the guidelines specified in the IMF's Fiscal Code was an in-depth exploration of compliance, beneath the formal provisions in place. The peculiar genius of Indian misgovernance is that, while complying with transparency requirements in a superficial sense, there are enough exceptions and anomalies tucked away in the system for it to achieve obfuscation to an impressive degree. The Group was advantageously placed in terms of its membership to ferret out examples where there is de jure compliance, but none de facto. It does not do this. Further, the RORB is largely confined to compliance at the central government level. It does deal to some degree with inter-government issues between centre and states, but not with state-local issues.

In 1998 the International Monetary Fund issued a set of Codes of Good Practices in a number of fiscal/financial spheres, fiscal transparency among them. Clearly motivated by the east Asian financial crisis of 1997, the Codes are predicated on the belief that information asymmetries are an important cause of financial-fiscal failure, and therefore that adherence to the Codes can help avert such failure. India was a participant country during the discussion and formulation stages.

Although conformity to the Codes is not mandatory, a surveillance mechanism has been set up to monitor compliance by member countries.

An internal IMF staff assessment of conformity by the government of India to the Fiscal Code was issued in February 2001. This IMF Report on Standards and Codes (ROSC), which is available in the public domain, is an excellent and concise summary of what may be termed ‘nominal’ conformity in the sense of formal provisions in place.

The IMF Staff ROSC in general gives high marks to India. The following summary paragraph deserves to be reproduced in this context: India has achieved a reasonably high level of fiscal transparency, especially as regards the amount of fiscal information that is made available to the public. The passing of fiscal policy legislation currently before parliament would result in the publication of statements that address the current lack of background information and analysis in connection with the central government budget. However, there would still be need to pay more attention to reporting on general government finances, to providing information on contingent liabilities and quasi-fiscal activities, and to the analysis of fiscal risks.

Subsequent to the ROSC, the Report of an Advisory Group set up by the Reserve Bank of India (RORB) to assess conformity to the guidelines specified in the Fiscal Code, headed by Montek Ahluwalia, member of the Planning Commission, was issued in June 2001. The commentary that follows is confined to the RORB, which is based on the final version of the Fiscal Code issued in May 2001 by the IMF.

The RORB appears to concur with the ROSC in its overall approval. What one expected however from the Indian Advisory Group was a further and more in-depth exploration of compliance, beneath the formal provisions in place. The peculiar genius of Indian misgovernance is that, while complying fully with transparency requirements in a superficial sense, there are enough exceptions and anomalies tucked away in the system for it to achieve obfuscation to an impressive degree. The Group was advantageously positioned in terms of its membership, which included senior members with experience of government at all levels, to ferret out examples where there is de jure compliance, but none de facto. It does not do this.

The RORB is largely confined to compliance at the central government level, in accordance with the IMF Code itself, whose applicability also was restricted to central government in the first instance. It does however deal to some degree with inter-government issues between centre and states, but not with state-local issues.

The numbered guidelines in the IMF Fiscal Code are grouped under the following four general principles:

(1) Clarity of roles and responsibilities within government and between government and the rest of the economy.
(2) Public availability of information on fiscal outcomes.
(3) Open and transparent budget preparation, execution and reporting.
(4) Assurances of integrity, including those relating to the quality of fiscal data and the need for independent scrutiny of fiscal information.
The RORB deals with each of the numbered guidelines under the four transparency principles.

(1) Clarity of Roles and Responsibilities Of the four principles, this is the most basic, in that without clarity of role and responsibility, none of the other three principles can even be contemplated. The RORB accordingly gives it the most extensive treatment.

Guideline 1.1.1 under this principle stipulates that the structure and functions of government should be fully specified. On this, the RORB concludes: “This principle is fully complied with” (p 5).1  Guideline 1.1.2 requires that the responsibilities of different levels of government and of the executive branch, the legislative branch and the judiciary should be well defined. On this again, the RORB concludes quite emphatically. “This requirement is met because the allocation of expenditure responsibilities follows the division of legislative power between the central- and state government-level laid down in the Constitution. Each level of government has its area of exclusive jurisdiction...”(p 7).

While it is certainly true that the Seventh Schedule of the Constitution itemises the spheres of the centre (List I), states (List II) and a shared “Concurrent” sphere (List III), there are encroachments in actual functioning upon spaces that have been clearly demarcated on paper. For example agriculture, defined to include agricultural education and research, protection against pests and prevention of plant diseases, has been in the provincial/state sphere of functions ever since the Government of India Act of 1935, and so continues under entry 14 in List II. Other related subjects in List II are entry 18 covering land rights; 15 and 16 covering livestock; 21 covering fisheries; and 32 covering cooperative societies.

There is nevertheless a ministry of agriculture at the centre with a consolidated budgetary provision of nearly Rs 4,000 crore for 2001-02, summing across the departments of agriculture and cooperation, agricultural research and education, husbandry and dairying, and food processing, all of which belong exclusively in the state list. Any planning or statistics-gathering roles performed by the ministry of agriculture, both constitutionally legitimate domains for the centre concurrently shared in List III with states, merely duplicate the domains of other agencies at the centre, such as the Planning Commission, and the Central Statistical Organisation respectively.

If fiscal transparency is seen as a desirable objective because of reduced information asymmetry, functional encroachments, by imposing additional miles of file routings, create fundamental information asymmetries in respect of timing of receipt of funds at the ultimate point of expenditure, which can in extreme cases negate the purpose of the fund flow, and certainly in all cases, reduce the effectiveness of it. Functions relating to agriculture were assigned to the state sphere to improve the speed of response to an activity that is spatially dispersed. To the extent these functions are encroached upon by the centre, the responsiveness and quality of governance is reduced. There can be no pinning of responsibility for lapses when it is shared by so many agencies at so many levels of government.

Agriculture is by no means the sole example of functional encroachment and redundancy. There is a central ministry of health and family welfare with a budgetary allocation of over Rs 6,750 crore in 2001-02, grouping together health, which is in the state List of the Seventh Schedule (entry 6 of List II covers public health and sanitation, hospitals and dispensaries), with family welfare, which is on the Concurrent list (entry 24 of List III). There is a large ministry of rural development, carrying a consolidated budgetary provision of more than Rs 1,2000 crore in 2001-02, which similarly groups together schemes for drinking water supply (entry 17 of the state list) with rural employment (entry 23 of the Concurrent List). These central ministries direct funding at rural areas independently, with no coordination, and sometimes at cross-purposes.

The RORB could have served a very important purpose if it had performed a few trackings of the ports of call of the relevant files, and the interval in time between enactment of the budgetary provision for a particular scheme, such as for example the rural roads programme, and its eventual expression as expenditure in the field. This is not a trivial issue. It is a matter of the deepest macroeconomic consequence for a country where neglect of public expenditure on roads and other infrastructure, and more importantly, lack of transparency in respect of public expenditure, have reduced private investment to a trickle.

The RORB correctly distinguishes between fiscal transparency, macroeconomic fiscal balance, and microeconomic fiscal efficiency, in the following words: “Fiscal transparency is quite distinct from these two important aspects of fiscal policy since it focuses on the more limited issue of whether sufficient information on the fiscal situation is being provided in a timely fashion to enable observers, including especially financial market participants, to make an accurate assessment of the underlying fiscal position” (p 3). Functional encroachment thus belongs centrally in the transparency sphere as defined by the RORB, and yet is not even mentioned, let alone examined.

The further delegation of functional powers from state to local governments after the 73rd and 74th Amendments lay outside the purview of the RORB, and in any case is not something on which a general assessment is possible since these are legislated by, and hence vary across, states. What it did need to do, however, was to point out that since local government is the level at which essential developmental services relating to health, water, education are actually delivered, there is urgent need for functional clarity not only between state and local spheres, but in rural areas between the three tiers at district, block and village level. Formal functional assignments can be negated by lack of collateral administrative freedoms. Thus for example, a functional transfer from state to panchayat-level is inoperative if state-legislated caps on discretionary spending by panchayats are very low [Rajaraman 2000]. Procedural issues of this kind lie at the heart of the fiscal transparency issue.

On taxation powers, the Group again gives full marks for clarity of division between centre and states. There is no mention whatever of the ongoing tussle between centre and states over indirect taxation of services. The service sector presently accounts for 52 per cent of GDP, and has been the fastest growing sector in the 1990s. Transparency in respect of the right to tax services clearly matters therefore. The principle underlying the constitutional assignment whereby those services with interstate implications were assigned to the centre; those without interstate implications to the states; and residuary powers assigned to the centre; was already tested before the VAT principle brought it into sharp focus. But the state-level VAT, which must extend to consumption of services along with goods within the state, confronts a serious overlap and lack of clarity with the residuary powers under which the centre now taxes 41 services, not all of which carry interstate implications. This issue finds no mention whatever in the RORB.

On the Finance Commissions, which are appointed at five-year intervals to recommend the tax-sharing configuration between centre and states, the RORB merely says, “Thus far, the recommendations of the Finance Commissions on the sharing of revenues between the centre and states have been accepted without amendment” (p 7). Nothing is said about the transparency of functioning of the Finance Commissions themselves. Alterations of tax-sharing formulae from one commission to the next are rarely justified, or predicated on research findings on the efficiency and equity outcomes of fiscal transfers from centre to states, which include more than just the statutory transfers prescribed by the finance commissions (for some recent findings see Cashin and Sahay (1996) and Rao and Singh (2000)). Even the database assembled every five years at national expense is withheld from the public domain. The best-kept fiscal secret is how much each finance commission costs the country, aggregating across establishment expenditures by the centre, and expenditures by state governments on visits by the commission to the states.

On the role of the judiciary again, the Group is superficial and non-committal in its one-paragraph consideration of the role of courts in the legality of taxation. Legal challenge is certainly possible in India, and that is good. But long durations between challenge and decision, tending towards infinity, can mean large amounts of tax arrears locked up in courts. The Advisory Group was particularly advantageously situated to examine numbers on revenue obstructed through litigation, and on intervals between challenge and decision, on which to base their judgment as to whether the existing laws have played a facilitative or obstructive role in promoting fiscal transparency.

On legislative participation in the conduct of fiscal policy, the IMF Manual which accompanies the Codes recommends ‘active’ legislative committees which ‘facilitate civil society inputs’ into the budget. The stress here is on the word ‘active’, as in effective. The Group in response merely lists the committees which exist for the purpose. The list by itself is most impressive.

There are standing committees of parliament, which are expected to examine the budgeted expenditure of each ministry. To quote the Group, “This Committee examines past expenditure levels along with proposals for the next year and submits a report to the Parliament as part of the formal process of budgetary approval. It is open to the standing committee to invite inputs from civil society, but this is not yet an established practice” (p 8). Were expenditures examined only departmentally, or did these committees ever call for a breakdown by economic category? What actions were taken on their recommendations? As far as civil society participation is concerned, the problem is not so much that the standing committees do not invite inputs from civil society. The problem instead is that civil society is entirely unaware that these kinds of committees exist at all.

Then there is the Public Accounts Committee (PAC), whose existence is more widely known. PAC reports, some of very high quality, are ritually placed before parliament, and ritually ignored, since its role is purely advisory.

There is a consultative committee for the ministry of finance, whose proceedings are not made public.

Finally, and most ineffectively, there is the Committee on Public Enterprises, which is expected to watch the functioning of the non-financial public sector.

Fiscal transparency is a matter not of the existence of such committees, but of the manner of their functioning.

For example, one of the most extraordinary feats of fiscal non-transparency in the world is the infamous Oil Pool Account, an extra-budgetary fund operated by the Oil Coordination Committee. The Oil Pool functioned essentially as a domestic consumer price stabiliser, and guarantor of profits to domestic refineries, and whether in surplus or deficit, had important budgetary implications which were nowhere evident in the Budget Documents themselves. The RORB highlights this lapse, but notes that the Oil Pool is to be dissolved in April 2002. Rather, what the RORB needed to highlight was that the panoply of committees that oversees the government’s fiscal operations was unable to render transparent the functioning of the Oil Pool, or demand its formal inclusion in the budget. These committees demonstrably failed to provide an endogenous transparency check.

On quasi-fiscal activities (QFAs) the Group defines these somewhat restrictively as “non-market behaviour which is specifically mandated by the government, by virtue of its ownership and control, with the objective of meeting an explicit fiscal purpose such as providing a subsidy to a particular group in society” (p 13). This is too restrictive a definition. Non-market behaviour mandated by the government is merely the transparent component of QFAs. There is the non-transparent component whereby PSU staff size and other operating expenses are inflated by verbal, sometimes even written, directives from politicians or bureaucrats. This is a process whereby expenditure on government and on public servants is implicitly transferred out of the budget, but with an explicit fiscal outcome in the form of reduced PSU profits flowing into the budget, or budgetary cover for PSU losses. The measure of QFAs should therefore not be an ‘explicit fiscal purpose’, as defined by the Advisory Group, but rather the explicit fiscal outcome on account of both explicit and implicit directives from government. Such QFAs can be estimated indirectly by comparing, for example, staff size in PSUs with private sector concerns in the same activity. This was the kind of oversight which the parliamentary standing committee on PSUs ought to have done, and failed lamentably to do.

On fiscal management responsibility (guidelines 1.1.3a), the Group rightly points out that the finance ministry is presently under no statutory obligation to defend its fiscal marksmanship, but incorrectly states that the Fiscal Responsibility and Budget Management Bill, presently before parliament, will change all that if passed into law. The problem with the Bill is that targets are specified solely in terms of deficits, without any underpinning in terms of revenue performance [Rajaraman 2001a]. Under the Bill, the revenue deficit is required to reach zero, and the gross fiscal deficit is to reach a target of 2 per cent of GDP by March 31, 2006 with a minimum reduction requirement of a half per cent of GDP annually starting April 1, 2001. But the FRB says nothing about tax performance targets. Taxes constitute three-fourths of total current revenue. Tax receipts have fallen by 2 percentage points of GDP since the start of reform. Unless fiscal responsibility is specified in terms of underlying parameters, such as the tax-GDP ratio, departmental responsibility for achieving fiscal targets is not apportioned. Without such apportionment, the source of failure to reach any targeted outcome cannot be pinpointed and addressed.

On government involvement in the private sector, which Guideline 1.1.5 specifies should be “conducted in an open and public manner, and on the basis of clear rules and procedures that are applied in a nondiscriminatory way”, the Advisory Group concludes that the guideline is substantially met, and elaborates “The interface between the government and the rest of the economy is governed by an elaborate constitutional and legal framework. Government regulation of the non-government sector is based on specific powers conferred by law and is exercised on the basis of well-defined rules and procedures. These powers are subject to challenge in courts as to their legality.”

The reality is that the specific powers conferred by law are so wide-ranging as to cover every aspect of the functioning of private enterprises, should they actually be enforced. Private enterprises which are able to function in this milieu are those that have managed to reach a bilateral understanding with the relevant government department as to which laws will be enforced, and which will not. This bilateral understanding may be rudely disrupted by a change of government, or of personnel in the department. This feature is not to be dismissed as a merely quirky feature of the functioning of our government. It has had, and continues to have, important macroeconomic implications because of the role it plays in keeping foreign direct investment out of India. Unless the parameters governing government regulation of the private sector are immediately addressed, reduced from their present wide ranging coverage, and the enforcement machinery thereof made abundantly clear and transparent, foreign capital will shun India. Contrary to the Advisory Group’s assessment, this is a requirement that is yet to be substantially addressed, let alone met. The Group states that the new statutory regulatory bodies such as CERC in electricity, TRAI in telecom, SEBI in capital markets, and IRDA in insurance, mark a substantial move towards greater transparency in regulation. Perhaps, but because some of these agencies are recommendatory, with limited powers of enforcement, they have not all been very effective. The Group may not have had the answers to issues of independence and accountability, but at the very least, it should have posed them.

The best and most responsible section of RORB is that dealing with guideline 1.2.2 on central tax laws and regulations relating to taxes falling in the central sphere. “Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application.” The RORB comprehensively lists reasons for failure to meet this guideline ranging from the large number of taxes and exemptions, and frequent changes in provisions, all leading to considerable scope for discretion on the part of enforcing officials. This is one of the few sections with quantified information, on the numbers of exemptions under central excise, for example. On information technology, the report states: “However the use of IT has been initiated and is still in a rudimentary phase, and electronic filing is hardly prevalent in India” (p 19). The Group needed to move into greater depth on the issue of transitions from non-transparent to transparent systems, and on mechanisms whereby obstructions to the transition can be effectively countered. This issue is referred to again in what follows, in connection with the guidelines under the fourth principle.

(2) Public Availability of Information The guidelines under this principle are to some degree subsumed under the first. An additional explicit stipulation (guideline 2.1.2) is that: “Information comparable to that in the annual budget should be provided for the outturns of the two preceding fiscal years, together with forecasts of key budget aggregates for the two years following the budget”. Clearly, the larger underlying requirement implied by a two-year forecast is the guarantee this provides that changes in rates of levy and other parameters will be made known two years in advance.

The RORB concedes that India is still far away from this kind of predictability and recommends that a start be made by providing more comparative information on Budget Estimates, Revised Estimates and Actuals for past years.

On the fiscal marksmanship issue, already mentioned in connection with the first guideline, a reason for the poor record on this front could be the lack of a clearly understood departmental process in defining the budget estimate in the first place. Much depends on what is the designated residual in the internal fiscal process leading up to the budget. If the fiscal deficit, instead of being residually determined after departmental estimates of feasible revenue collections are juxtaposed against expenditure projections, is targeted at some ‘acceptable’ level, leading to a residual revenue requirement that is known to be infeasible right at the time of budget formulation, clearly fiscal marksmanship is going to be poor. Unforeseen exogenous shocks such as the Kargil war are one matter. But continued lack of correspondence between budget estimates and actuals, year after year, can only be an indicator of the lack of transparency in the internal budget formulation exercises, whereby budget estimates are made without any commitment as to their achievability.

On the issue of contingent liabilities this is one area where the Advisory Group delivers a more harsh judgment than warranted. The exchange guarantee given by the government of India for the Resurgent India Bonds and the India Millennium Deposits has been backed by the issue of non-negotiable non-interest bearing securities of infinite maturity to the RBI, and has not been shown as a part of the fiscal deficit, but then again, such transactions are not a part of the fiscal deficit. These securities are indeed shown in the stock of outstanding liabilities of the government, and that is the reporting arena where it belongs. The exchange guarantee itself was most unfortunate, but the reporting of it was not lacking in transparency. The Group also mentions the dues of the Life Insurance Corporation as examples of unlisted contingent obligations. But in that sense, all dues of PSU financial institutions are implicitly underwritten by the government of India.

On the obligation to report tax expenditures, again the Advisory Group is more demanding than warranted. It is enough if the major exemptions to each tax are listed in an appendix to the budget, issued say once in five years, with incremental changes accompanying each budget. Such a listing will in itself serve as a check on the introduction of new tax exemptions, which can be slipped in between budgets through notifications. That, along with information on the pattern of use of these incentives by type and class of taxpayer, can lead to informed judgment on achieved outcomes from the incentives offered. It is information of this type which is needed rather than quantification of the tax expenditure each exemption carries, which is a difficult exercise to do at all accurately. To give just one example, exemptions intended to incentivise backward area location or savings in specified instruments can be quantified in terms of tax expenditure only with reference to a counterfactual, i e, the situation that would have obtained in the absence of the exemption. Construction of such counterfactuals is not an easy exercise, particularly when, as in the case of backward area incentives, state government incentives are overlaid on central incentives.

There has been a provision on the books since 1973-74 whereby agricultural income, on which no central income tax is leviable, is to be reported on tax returns for determination of slab rates on non-agricultural income. No information is available on the numbers of taxpayers actually reporting agricultural income under this requirement. This is one of many such examples. No information is available even on the numbers of people paying income tax. The 25 million tax returns presently submitted do not include those paying taxes on salary through TDS, who do not submit a tax return because they are not required to under the ‘one by six’ scheme. There is probably no other country in the world with a personal income tax where information is not available on the total number paying the income tax.

Faced with this kind of total information vacuum, the Advisory Group was jumping the gun in asking for tax expenditures to be quantified. Let us get some basic information first.

The RORB dwells on contingent liabilities at state-level, where the problem is commonly held to be particularly acute. A mitigating consideration ought to have been mentioned here upfront. Commercial bank loans to state-level parastatals often require state government underwriting, where such guarantees become in effect a substitute for a proper commercial evaluation of the loan. This, rather than fiscal irresponsibility, has been the problem. The outcome is worrying, whatever the cause. But the cause matters, for reform of the situation.

(3) Open Budget Preparation, Execution and Reporting The guidelines under this head are largely a repeat and further amplification of those under the first and second. But it has to be said that the following guideline is excessively demanding: “The annual budget should be prepared and presented within a comprehensive and consistent quantitative macroeconomic framework and the main assumptions underlying the budget should be provided” (p 31). Such underpinnings are not commonly provided in the budget documents even of developed countries. The recommendation of the Advisory Group deserves to be reproduced in full:


We recognise that there are obvious difficulties in having an official forecasting model for the Indian economy developed by and operated by the finance ministry. It would require a substantial professional input, with continuous updating of data and parameters. There are also problems arising from the fact that models differ significantly in specifications and calibration which can lead to very different results and the finance ministry may not wish to commit itself to any particular specification. However, the finance ministry could finesse this problem by sponsoring two or three research institutes to develop alternative models capable of simulating the major macroeconomic variables, e g, (1) a macroeconomic balance; (2) a tax equation with scope of buoyancy and elasticity considerations; (3) an expenditure equation with scope of reduction or expansion; (4) if possible, a representation of non-financial public sector operations; (5) private investment, constraints thereof, and, if possible, a recognition of private sector investment in infrastructure; (6) foreign trade and international finance; (7) foreign investment; (8) labour market; (9) price controls; (10) a monetary equation; and (11) financial sector characterisation. It might even be possible to build in some estimates of the impact on poverty also. The structure of these models could be published and reports on their forecasts could also be published each year, with mid-year updates (pp 32-33).

Before attempting anything so ambitious, a few simple issues need to be sorted out. The projections of the Eleventh Finance Commission for central direct taxes based on historical growth rates of revenue over the period 1987-88 to 1999-2000 (RE) yield implicit buoyancies of 1.54 for the corporate tax, and 1.44 for the personal income tax. However, the official revenue figures yield buoyancies for corporate income tax of 0.92 for the eighties, and 1.30 for the nineties, well below 1.54. The corresponding coefficients for the personal income tax were 1.09 for the eighties, 1.23 in the nineties, well below 1.44. We need to sort out these sorts of fairly basic inconsistencies before setting more ambitious goals for ourselves.

One lacuna correctly identified by the Group (under guideline 3.2.1), and immediately capable of rectification, is the absence of classification of expenditures by economic category. This is vitally necessary, and is absent at both central and state levels. Expenditure reform, indeed any preliminary understanding of the structure of expenditure, is not possible without a breakdown of expenditure trends by salary, pensions, goods and services, interest. Of these, only interest is routinely provided.

There is a requirement (guideline 3.2.2) that “a statement of objectives to be achieved by major budget programmes (e g, improvement in relevant social indicators) should be provided”. The Group judges that this is ‘substantially met’. A related guideline (3.4.3) specifies that “Results achieved relative to the objectives of major budget programmes should be reported to the legislature”. The Group’s judgment is that this is fully complied with.

Neither of the above two judgments is valid in respect of the major anti-poverty programmes of the centre. There is enough reporting of figures, buried in an assortment of Annual Reports of the relevant ministries, to enable interested scholars to burrow through and highlight the issues. But there is no effective use of this information within the fiscal process itself to investigate what should surely be a matter of acute concern for a fiscally stressed government, facing constant pressure to curtail the quantum of expenditure.

The total central budgetary provision in 2001-02 for the major developmental schemes of the ministry of rural development alone amounts to Rs 12,000 crore, about half a percentage point of GDP. Of this total, a third is accounted for by the two rural employment schemes, the Jawahar Gram Samriddhi Yojana (JGSY) and the Employment Assurance Scheme (EAS). These schemes were redefined starting 1999-00 to carry rural infrastructure as a principal (JGSY) or secondary (EAS) objective. These two schemes provide a dramatic illustration of the absence of any kind of examination in the Indian fiscal process of the effectiveness of public expenditure [Rajaraman 2001b].

The latest Annual Report of the ministry of rural development shows utilisation rates at mid-year in 2000-01 for both the JGSY (up to October), and the EAS (up to December) of 42 per cent of available funding at mid-year, which is around half the full-year provision. The corresponding mid-year figures for the two schemes in the preceding year, 1999-00, were at similar levels of 46 and 43 per cent. By year-end, utilisation had risen to 73 and 75 per cent respectively of the full-year fund provision. Thus expenditure in both schemes was twice as high in the second half of the fiscal year as compared to the first half, prima facie indicative of wasteful utilisation. What is of even greater concern is that the state-wise utilisation figures, provided in the same publication for the JGSY, though not for the EAS, shows wide variation across states, with statistically significant evidence that the worse-off states show lower offtake of JGSY funds [Rajaraman 2001a]. Examination of these kinds of systematic variation in expenditure utilisation is what is critically needed for guidelines 3.2.2 and 3.4.3 to have been ‘substantially met’.

(4) Assurances of Integrity (in Respect of Fiscal Data) This principle again overlaps with the previous one, because data quality is clearly an integral part of openness of budget reporting and preparation. Issues bearing on the fiscal deficit itself, having to do with the Oil Pool balance for example, have already been dealt with.

Guideline 4.2.3 explicitly requires that “a national statistics agency should be provided with the institutional independence to verify the quality of fiscal data”. A related and very important issue is the quality of national accounts data, with respect to which all fiscal magnitudes are normalised. The RORB defers the issue to the National (Rangarajan) Statistical Commission, which at the time was in session, but has since issued its report in two volumes (RNSC). In a bid to improve public trust in official statistics, the RNSC recommends the creation through an Act of Parliament of a permanent National Commission on Statistics, which would oversee the work of a National Statistical Organisation, a renamed and enhanced version of the present CSO. This goes part of the way towards meeting the IMF requirement of a technically independent national statistics agency. The new scheme recommended by the RNSC provides for formal lateral coordination with the statistics departments of the central ministries, but does not recommend that all these statistics departments be unified.

A section of the RNSC deals with fiscal statistics. Of all its excellent recommendations, the single most important (para 10.8.29) has to do with computerisation and networking of the field offices of tax collection agencies. This clarion call was however issued as far back as December 1991 in the Interim Report of the Tax Reforms (Chelliah) Committee (paras 10.6 and 10.17). It is clear that that recommendation has faced severe implementation obstacles.

With fiscal statistics as in all other areas, transition from non-transparent to transparent systems lies at the heart of the problem, but the RORB, instead of examining obstructions to the transition, gives the general impression that much of the journey has already been traversed, and that we are well within sight of the destination.


[The author thanks R J Chelliah for a clarificatory discussion on taxation of services, and James Gordon for useful comments; the usual disclaimer applies.]

1 With just a passing recommendation that the institutional table for India in the Government Financial Statistics Yearbook of the IMF should be more detailed.
Cashin, Paul and Ratna Sahay, (1996): ‘Internal Migration, Centre-State Grants, and Economic Growth in the States of India’, International Monetary Fund Staff Papers, 43, 1.
Government of India (1991): Interim Report of the Tax Reforms (Chelliah) Committee.
– (2000a): Report of the National (Rangarajan) Statistical Commission (RNSC), August.
– (2000b): Report of the Eleventh Finance Commission, June.
International Monetary Fund (2001): Report on the Observance of Standards and Codes (ROSC), February.
Rajaraman, Indira (2001a): ‘Expenditure Reform’, The Economic Times, May 10.
– (2001b): ‘Growth-Accelerating Fiscal Devolution to the Third Tier’, paper presented at World Bank-NIPFP-DFID Conference on India: Fiscal Policies to Accelerate Economic Growth, May 21-22, New Delhi.
– (2000): ‘Fiscal Features of Rural Local Government in India’ in J J Dethier (ed), Governance, Decentralisation and Reform in China, India and Russia, Kluwer, pp 189-227.
Rao, M Govinda and Nirvikar Singh (2000): ‘The Political Economy of Centre-State Fiscal Transfers in India’, mimeo; May.
Reserve Bank of India (2001): Report of the RBI Advisory Group on Fiscal Transparency (RORB), June.

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