It is worth noting that these conditions are actually far more stringent and restrictive than even the European Union's infamous Maastricht criteria, which allow 3 per cent of GDP for the fiscal deficit and 50 per cent of GDP for the public debt. They are even more stringent than the recommendations of the Committee on Fiscal Responsibility Legislation, which also suggested fiscal deficit limits of 3 per cent of GDP.
 
Of course, the particular relevance or sanctity of the 3 per cent figure has never been adequately explained, even by its most ardent supporters. It is clearly an arbitrary rule of thumb criterion that has somehow met with some degree of wider approval, among financial markets in particular. But a much lower limit of only 2 per cent, in a developing economy with structural constraints on growth, is even more strange and difficult to explain. What considerations prompted the Finance Minister to choose this very low figure as an upper limit for one of the most critical instruments in the hands of the state for promoting investment and growth?
 
Note also that this provision makes no concession for the cyclical nature of deficits (the fact that fiscal deficits tend to increase during the downswing and decrease during the upswing) or for estimating a "structural deficit" which would take account of this. This makes it even more rigid and inflexible than similar fiscal responsibility legislation in other countries, and totally constrains the ability of the government to respond to downturns in economic activity through a more reflationary fiscal stance. While this may comfort financial markets (although even this is debatable) and those obsessed with balanced budgets, it is difficult to see how domestic economic agents, including industry, could possible welcome it, since it would leave them completely unprotected over a recession.
 
In addition to these alarming conditions that have to met, the bill requires that Central Bank accommodation to the government should be minimised. Thus there is a stipulation that " the Central Government shall not borrow from the Reserve Bank" except by way of temporary ways and means cash advances to be settled over each financial year. This, too, is an extraordinary provision, which completely misses the point about the functions of central banking.
 
The reasons for this provision are explained in more detail in the Report of the Committee, which points to "the necessity of insulating the central bank from the pressure of the Government" and argues that otherwise two unfortunate and negative effects may arise. First, the government may be tempted to use deficit financing (that is money creation) to finance expenditures, which it is argued would create an "inflation tax" on the country. There is no basis for believing this, since the increase in base money does not create inflation, which as mentioned earlier results from the excess of aggregate expenditure over aggregate income.
 
Second, and even more tellingly, the Committee argues that " given the trade-off between price stability and output in the short-run, (there is) the risk of the Government sacrificing price stability in favour of higher output levels." (Report, page 11) Could there now be any doubt as to whose interests such legislation serves? The possibility of higher output, creating more employment and income for the citizens of the country, is to be sacrificed at the dubious altar of the price stability beloved of finance, which is (mistakenly) supposed to result from the curtailment of RBI credit to the government!
 
All these quite arbitrary and incredibly stringent rules are presented, both in the Committee's Report and in the final proposed Bill, as if they are easily justifiable and even completely natural. The truth is that they are both unwarranted and unnecessary, and if implemented they would actually be substantially detrimental to the material interest of most of the Indian people. This is because such measures would not only force deflation on the economy, but also involve reductions in public expenditure to meet these very severe criteria, so that public expenditure which is important and necessary for growth and welfare would not be made.