Economic Survey for New Fiscal Responsibility and Budget Management Act

Emphasising the need to strengthen public finances, the pre-budget survey said on Wednesday the country requires a new Fiscal Responsibility and Budget Management (FRBM) Act with 'teeth'.

"India needs a sharp fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, and improved budgetary management," said the Economic Survey  2013-14, tabled in Parliament by Finance Minister Arun Jaitley on Wednesday.

A fresh thinking is required on a responsible fiscal policy framework, it said, adding that "the modified Act needs to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored".

The fiscal situation of the central government is worse than it appears, given the acceleration of inflation from 2006 to 2014, it said.

These inflation shocks effectively reduced the value of outstanding debt, it said, adding, this has harmed the interests of households but has reduced the debt burden of the government.

However, it said, these inflation shocks are unlikely to recur in the future, adding that public finances need to be put on a sustainable path.

The survey said improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment.

The tax regime must be simple, predictable, and stable, it said, adding, this requires a single-rate goods and services tax (GST), a simple direct tax code (DTC), and a transformation of tax administration.

On the government expenditure reform, the survey said, there is need to shift subsidy programmes away from price distortions to income support, a change in the focus of government spending towards provision of public goods, and a systems of accountability through a focus on outcomes.

"Fiscal responsibility and tax and expenditure reform is a medium-term agenda and likely to take two to three years to implement," it said.

The positive effects, however, are likely to become visible as soon as the government makes a commitment to some of these reforms, it said.

Improvements in credit ratings, lower inflation, lower cost of capital, and greater business confidence that would ensue will yield short-term benefits in response to long-term initiatives, it added.