Constraining leviathan: What can Parliamentary law do?

Indian Express, 8 September 2023

by Pratik Datta, Radhika Pandey, Ila Patnaik and Ajay Shah.

Today's deficit is tomorrow's taxation. The ruling party always has an incentive to spend more today in the hope of winning the next election, and plan to sort out the fiscal problems at a future date. For this reason, democracies suffer from a systematic problem of excessive deficits and the adverse economic impacts associated with this.

Fiscal thinkers have long sought to address the problem through Fiscal Responsibility Law ("FRL"). For example, the German constitution enshrines a "debt brake" by limiting annual federal government borrowing (adjusted for the economic cycle) to no more than 0.35 per cent of GDP. Similarly, the US imposes a statutory debt ceiling, that is, a limit on the total amount of money that the US government is authorised to borrow to meet its existing legal obligations. Every once in a while, the US federal government shuts down when this limit is reached.

By the 1990s, there was a growing consensus in India that some legal shackles needed to be placed on the leviathan, the Union government. Article 292 of the Constitution of India allows the Union government to borrow upon the security of the Consolidated Fund of India, subject to limits imposed by the Parliament. For many years, it was felt that this gives the pathway to establish FRL. There was an expert committee led by EAS Sarma which led up to the Fiscal Responsibility and Budget Management Act, 2003 (FRBM), and the Vijay Kelkar Task Force on Implementing the FRBM (2004).

We now have ample evidence on the working of this law. In most years, the budgeted and then the actual values deviate from the original law. A big question in establishing the right institutional framework for Indian public finance lies in diagnosing the sources of these two decades of experience and finding the right way forward. Many have written on these questions, and the FRBM Review Committee Report (2017) proposed a new Debt Management and Fiscal Responsibility Bill (DMFR Bill) which aims to solve these problems.

In a new paper, Understanding deviations from the fiscal responsibility law in India, we look at the constitutional foundations of fiscal responsibility. We argue that the mechanism of the money bill in the Constitution of India interferes with the possibility that Parliamentary law can fiscally restrain the leviathan. Our reasoning starts at Article 110 of the Indian Constitution which says that a bill which regulates "the borrowing of money" by the Government of India or provides for "amendment of the law with respect to any financial obligation" undertaken by the Government of India can be classified as a money bill. As a consequence, any provision of an FRL that constrains the fiscal discretion of the executive government can be amended by the executive government through a money bill.

The Finance Bill is a money bill. The ruling party exerts tremendous effort in ensuring that this wins in the Lok Sabha. The approval of the Rajya Sabha is not required. Diluting the FRBM Act is too easy for the Ministry of Finance as suitable provisions can just be slipped into the Finance Bill, which is able to contain amendments to other Parliamentary laws. Every amendment to the FRBM Act can be a money bill and is thus fair game for modification within the Finance Bill.

This is borne out by the Indian experience. Repeated legislative amendments to the FRBM Act 2003 have delayed the timeline for meeting the fiscal targets under the statute. These amendments were brought in through various Finance Acts, which were passed by the Lok Sabha as money bills. For instance, section 4(1) of the FRBM Act, 2003 originally required the Union government to take appropriate measures to eliminate the revenue deficit by March 31, 2008. The Finance Act, 2004, which was enacted as a money bill, extended the deadline to March 31, 2009. Similarly, the Finance Act, 2012, which was also enacted as a money bill, changed it to March 31, 2015. Subsequently, Finance Act, 2015, which was again enacted as a money bill, changed it to March 31, 2018. Effectively, the money bill route has been consistently used as a constitutional escape clause by successive governments to dilute the fiscal targets under the FRBM Act, 2003.

Even if many Parliamentarians do not agree with the way a Finance Bill amends the fiscal responsibility law, this does not create checks and balances. The first generic problem is that under the anti-defection law, no MP can vote against the wishes of the party leadership. In a coalition, where potentially some small parties could vote based on issues, the problem is that when a Finance Bill loses the vote, the government falls. Voting down the Finance Bill then becomes a nuclear option that a small party might hesitate to invoke, and that a ruling coalition will mobilise enormous capital to avoid.

Fiscal thinkers have thought a lot about the correct design of the fiscal rule, and about the correct design of the escape clause within the FRBM Act. However, our view is that the very concept of a money bill, as defined in the Constitution of India, constitutes the mother-of-all-escape clauses. It does not matter what the escape clause coded into the FRBM Act is, it does not matter how the FRBM Act imposes costs for the administration when violations take place. Every Finance Bill has the flexibility to modify the basic structure of the fiscal responsibility law. Therefore, under the Constitution of India, Parliamentary law is not useful in fiscally constraining leviathan.

Our plea is to stop trying to envision better ways of writing an FRL as Parliamentary law. India badly needs fiscal institution building that results in fiscal responsibility, but an FRL as Parliamentary law is not part of the answer. The fiscal thinkers need to don their thinking caps, go back to the arguments of 2001, and restart on the journey of ideas.

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