What is the issue?
- The government has been breaching the fiscal deficit targets time and again.
- Understanding the fiscal status in the light of the recent budget and the recent review committee's recommendations is imperative.
What is the FRBM Act?
- The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003.
- It led to the framing of FRBM Rules in 2004.
- Rules - It essentially sets targets for the Central government to ensure fiscal discipline.
- The FRBM rules set a target:
- for reduction of fiscal deficit to 3% of the GDP by 2008-09 (with annual reduction target of 0.3% of GDP)
- for complete elimination of revenue deficit by 2008-09 (with annual reduction target of 0.5% of the GDP)
- Amendments - The target of 3% was achieved only once, in 2007-08.
- It was thus first postponed and later suspended in 2009, following the global financial crisis.
- The FRBM Act was later amended twice, in 2012 and 2015.
- In May 2016, the government set up the NK Singh committee to review the FRBM Act.
- In this backdrop, the recent budget has reset the target again.
What is the present fiscal picture?
- FISCAL DEFICIT - The current Budget has retained the fiscal deficit at 3.5% of GDP.
- This is a deviation from the budgeted target of 3.2%.
- 3.2% itself is a deviation from the stipulated target of 3% for 2017-18 in the amended FRBM Act.
- DEBT - The debt-GDP ratio has increased to 49.1% in 2017-18 from 48.7% in 2016-17.
- The increase in debt-GDP ratio is against a declining trend observed until recently.
- MTFP - As per the requirement of the FRBM Act, a medium-term fiscal policy (MTFP) statement is presented in each Budget.
- The statement pertains to fiscal, revenue, and effective revenue deficits, and outstanding debt of the Central government.
- A review of the statements highlights missing the targets for all four variables often by big margins.
What are the recent changes in targets?
- FISCAL DEFICIT - Budget 2018-19 has proposed amending the FRBM Act again.
- This will shift the target of 3% fiscal deficit-GDP ratio to end-March 2021.
- DEBT - The general debt-GDP ratio is slated to be reduced to 60% of the GDP by 2024-25.
- The Central government debt-GDP ratio is to be reduced to 40% of the GDP by 2024-25.
- These targets are based on the recommendations of the FRBM Review Committee.
- However, the committee's target of 2022-23 is shifted to 2024-25.
What are the deviations from the recommendations?
- FISCAL DEFICIT - The FRBM review committee proposed the fiscal deficit to GDP ratio to be stabilised at 2.5%.
- This target is derived in reference to the annual estimate of available investible resources at 10% of GDP.
- It comprises of surplus savings of the household sector and sustainable net capital inflows.
- Apparently, the government did not accept this and continued with the 3% target.
- If 3% target is the case, the government would have continued with the present FRBM Act.
- REVENUE DEFICIT - The committee had specified a revenue deficit glide path, reaching 0.8% by 2022-23.
- But, no target has been set by the government for revenue deficit in the present budget.
- The target of revenue account balance is significant to a country.
- It is favourable if a country borrows as long as the entire borrowing is spent on capital spending.
- However, in the Indian context, the revenue deficit with some adjustments reflects government dis-savings.
- Unless government dis-savings are eliminated, it will be difficult to reverse the trend of a falling savings rate.
- FISCAL COUNCIL - The Committee recommended the setting up of a fiscal council.
- This is to independently examine the economic case and justification for deviating from the specified targets.
- This is to keep a check on unconstrained fiscal flexibility and to prevent the possibly avoidable fiscal risks.
- The Central government however did not accept this recommendation as well.
What are the concerns?
- FISCAL DISCIPLINE - A slippage margin of 50 basis points implies a delay in reaching the fiscal deficit target by two and a half years.
- The government has been missing the fiscal responsibility targets year after year and changing the statutory framework repeatedly.
- This questions the credibility of the government’s commitment to fiscal discipline.
- EXTRA-BUDGETARY RESOURCES - In the recent budget, government's total outlay for 3 focus areas is 11.6% of GDP.
- The focus areas are agriculture and rural livelihoods, infrastructure and education, and health and social sectors.
- Notably, budgetary resources constitute only 16.4% of the total outlay.
- The remaining 83.6% is to be raised as an extra-budgetary resource.
- This will be through the public sector enterprises concerned, special purpose vehicles and other similar institutions.
- However, a substantial part of this may only be based on borrowing.
- This is because the relevant bodies may have only limited surpluses.
- This will be an added borrowing dependence for extra-budgetary resources along with States' borrowing requirements.
- Given the already falling savings rate, increased borrowing can put considerable pressure on interest rates.
What is the way forward?
- The fiscal deficit rule in India has been honoured more in breach than in observance.
- Another year of fiscal slippage can be fatal for the economy.
- The fiscal deficit target needs continued vigilance to ensure sustainability for larger fiscal benefits.
Source: The Hindu
