SPENDING taxpayer’s money recklessly is a habit that politicians around the world acquire on getting elected, and for which they do not need much training. In India, politicians of all shades and colours have mastered the fine art of spending big money on mega projects, especially with elections around the corner.

Even in the US, pork-barrel politics has emerged as a major issue in election year 2008, with Republican front-runner John McCain railing against “politician’s love affair” with pork-barrel projects or ‘earmarks.’

Ministers in India routinely allocate large funds from their ministries for pet projects in their constituencies – a public sector steel unit, a railway carriage manufacturing factory, a shipyard, a refinery, or a fertiliser plant – but by the time the venture moves beyond the foundation-stone-laying stage, the fellow would have lost his portfolio and his replacement and ministry bureaucrats would have junked it.

Likewise, there are several ‘sacred cows’ that elected officials in India are reluctant to tamper with, including the huge subsidies on the three Fs – fuel, food and fertiliser. But this culture of political patronage has over the year’s wreaked havoc on government finances.

The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government, in a rare fit of fiscal rectitude, initiated moves to legislate a Fiscal Responsibility and Budget Management Act, to curb the tendency on the part of politicians to squander taxpayer’s money. The Indian Parliament debated the bill for three years, before it was enacted in 2003.

However, by the time it came on to the statute books a year later, the NDA government had been voted out, and was replaced by the Congress-led United Progressive Alliance government, which survived on the support of the Left parties. Pressure was brought on the Manmohan Singh government by its Left supporters, to dilute – if not junk – the act. Finance Minister P. Chidambaram got it amended, relaxing the target year – for attaining the goals – to 2008-09, instead of 2007-08.

The FRBM Act envisaged a reduction of the revenue deficit by 0.5 per cent of the gross domestic product (GDP) every year, and elimination by 2007-08. The fiscal deficit as a ratio of GDP was to be reduced by 0.3 per cent every year and brought down to three per cent by 2007-08. The UPA government resisted stiff opposition from the Left supporters, and only moved the goalposts by a year to 2008-09.

WITH elections in nearly a dozen states – including crucial ones like Delhi, Rajasthan, Madhya Pradesh and Karnataka – this year, and general elections in the first half of 2009, the Congress party has suddenly realised that the FRBM is actually a hindrance that prevents the government from lavishing funds on the ‘welfare’ of the poor.

The Congress last week virtually directed finance minister Chidambaram to kiss fiscal prudence goodbye by delaying implementation of the targets set by the FRBM Act by three years. The party wants the finance minister to don the mantle of Santa Claus and hand over goodies to various ministries, instead of turning down their ‘requests’ for funds by citing the FRBM Act.

A party committee, headed ironically by Veerappa Moily, one of the few pragmatic politicians in the party, has urged Chidambaram to shelve all talk of financial prudence and allocate large funds for populist schemes being planned by various ministries. The committee also bluntly points out that crucial state and general elections are looming ahead and the party cannot afford to alienate voters.

Chidambaram is to present the Union Budget on February 29. With the economy witnessing vibrant growth for the fourth successive year, tax revenues are buoyant. The finance ministry, keenly aware about next year’s deadline for curbing revenue and fiscal deficits, was unlikely to heed to some of the more outrageous spending plans of ministries.

The UPA government has been splurging on several so-called social sector programmes that are meant for the benefit of the poor. But a recent report of the Comptroller and Auditor General of India highlighted the slack implementation of its flagship programme, the National Rural Employment Guarantee Scheme in many states. The draft report of the watchdog exposed several deficiencies in its implementation.

But politicians in Delhi and in many state capitals are already on poll mode, and are unlikely to tolerate excuses about lack of funds from the finance minister. Chidambaram has over the last four years tried to resist wasteful expenditure and hodge-podge schemes by several ministries, earning him the ill-will of many party hacks and even from allies.

Left parties, for instance, last week made their usual demands: higher allocation for food subsidy, social sectors, withdrawal of concessions for industries in special economic zones, and a hefty Rs600 billion hike in gross budgetary support. It also gave vent to its pet peeve: calling for curbs on “speculative capital in the stock market” by re-introducing long-term capital tax, a hike in short-term capital gains tax and in the Securities Transaction Tax.

Prakash Karat, the leader of the Communist Party of India (Marxist) pointed out that the Left parties had always opposed “the unjustified and anti-development provisions of the FRBM Act.” The targets under the act should not hinder plan expenditure for fiscal 2008-09, he warned.

And like most other parties, the Leftists also called for writing off of loans for small and marginal farmers. Other political parties — across the spectrum — have been demanding similar concessions for farmers.

OF course, even without prodding from his party members and the Leftists, Chidambaram is unlikely to meet the FRBM targets this year or next. His ministry very cleverly moved away the huge subsidies on account of the three Fs — fuel, food and fertiliser — off the budget by going in for special bonds.

JP Morgan recently warned the government that the frequent issue of bonds to state-owned companies – to compensate them for loss incurred on the sale of the three highly-subsidised items – will derail the government’s finances. By issuing the bonds, the government ensures that the deficits are not reflected in its books of accounts, giving a false sense of security, and also appearing to stick to the FRBM Act’s targets.

Government subsidies on these three accounts alone are likely to raise its liabilities by nearly 2.5 per cent of the GDP. JP Morgan has warned the government that rating agencies will not take kindly to such developments and are unlikely to upgrade India’s ratings.

The International Monetary Fund has also been critical of the lack of progress on the fiscal consolidation front; bonds issued to oil and fertiliser companies, will add up to 1.2 per cent of the GDP. Taken together with the union government’s fiscal deficit, it adds up to a whopping 4.5 per cent of GDP.

Chidambaram, however, is confident that the overall macro-economic fundamentals continue to be strong. Tax collections are increasing at a healthy pace and expenditure trends in the current fiscal indicate that the fiscal target envisaged by the FRBM will be maintained, he avers.

According to the minister, the central tax to GDP ratio has gone up to 11.8 per cent in 2007-08 (as per budget estimates), providing much-needed resources to the government for its social expenditure and also for achieving fiscal consolidation.

But former finance minister – and BJP leader – Yashwant Sinha warns that the off-budget subsidies account for nearly three per cent of GDP. If added to the existing deficit, “then we are way out from the targets of the FRBM Act,” he adds. With buoyant tax revenues, this is the right time for the government to try to bring down both the revenue and fiscal deficits.

Of course, the fact is that even if Sinha had been the finance minister at this stage — year four in the five-year term of the government — his party would not have given him the leeway for such fiscal rectitude, with state and general elections round the corner.