In his budget speech for 2016-17, finance minister, Arun Jaitley had announced the government’s intent to review Fiscal Responsibility and Budget Management (FRBM) Act with a view to make the target flexible to make it range bound instead of a fixed number as had been the position hitherto under the extant Act in vogue since 2003. Accordingly, a committee under NK Singh was set up to examine this issue besides revamping of the Act.
The committee recommended a fiscal deficit target of 2.5% of gross domestic product (GDP), revenue deficit of 0.8%, a combined centre-state debt ceiling of 60% and a central debt ceiling of 40% by fiscal 2022-23, under a six-year medium-term fiscal roadmap. It also recommended a fiscal deficit of 3% for 2018-19. Further, the committee allowed the government an escape clause to breach the targets in the event of “far-reaching structural reforms with unanticipated fiscal implications”.
However, going by the Finance Bill 2018, it would appear that Modi government has decided to go a step further. Thus, it seeks to amend the FRBM Act to allow it to come down to a fiscal deficit target of 3% by 2020-21 instead of reaching this level by 2018-19. Further, the debt limit of 40% of GDP by the Centre and 60% for Centre and states combined will need to be achieved by 2024-25, as opposed to 2022-23.
The changes in Medium Term Fiscal Policy Statement (MTFPS) and Macro-Economic Framework Statement (MEFS) (these documents are released along with the Budget) also moot freeing up the government from having to report on sustainability of balance between revenue receipts and revenue expenditure (or revenue deficit) as also an assessment relating to growth in GDP and fiscal balance of the Union government (or the fiscal deficit).
The government has already started deviating from the roadmap. This is amply clear from the Budget for 2018-19. The revised fiscal deficit for 2017-18 is 3.5% against the target 3.2%. For 2018-19, Jaitley has set a target of 3.3% as against 3% sought by the committee.
The proposed relaxations militate against the very philosophy of FRBM Act which is to rein in governments from spending more than what they can support within available means. The finance bill not only pushes back the target by two years but also seeks to exempt the executive from reporting its actions to parliament.
The trigger may be the Centre’s concern that continuing with stiff target may come in the way of its efforts to pump prime investment in infrastructure namely roads, highways, railways, port, airport etc and other public sector projects at a time when investment in private sector is mute and economy needs a boost. This is without any basis.
During 2014-15, 2015-16 and 2016-17, private investment was mute and yet the economy registered an impressive growth of 7.5%, 8% and 7.1% respectively. This was facilitated by government’s reform initiatives that helped in bringing foreign investment on one hand and its own booster dose to public investment on the other. All this happened without compromising on fiscal discipline.
Apart from oil bonanza (due to decline in international price of crude from mid-2014 till end 2016), the government has garnered substantial resources by plugging leakages in delivery of subsidy. By making payments via direct benefit transfer (DBT), it has succeeded in eliminating millions of bogus beneficiaries of subsidy on LPG, food, pension and payments under Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). These measures have resulted in savings of about Rs 60,000 crores annually.
Further, Goods and Services Tax (GST) has led to over 50% increase in the number of assesses paying indirect tax. Though the collections under it are subdued for now, these are expected to get a big boost with implementation of anti-evasion measures (e-way bill and invoice matching). Besides, demonetisation has forced holders of ‘unaccounted’ cash (this is estimated to be about Rs 300,000 crore) to deposit it in the banks. In turn, this would lead to a quantum jump in direct tax collections.
The stage is thus set for buoyancy in tax collections – both direct and indirect – on the one hand and savings under welfare schemes on the other. Moreover, with effective resolution of twin balance sheet problem (courtesy, Insolvency and Bankruptcy Code and recapitalisation of banks), even private investment should revive thereby reducing pressure on the state for spending to sustain the momentum of growth. So, there are enough drivers to help maintain fiscal balance.
Lessons from past
Clearly, there is no valid basis for any apprehension that investment and in turn, growth would be impeded if the government were to stick to fiscal consolidation roadmap. Yet, if relaxation is granted – as contemplated under finance bill – this could breed complacency and lead to major slippages ahead. Indeed, there is a precedent which policymakers must not ignore.
During 2007-08, the then UPA government had achieved fiscal deficit of 2.5% of GDP as against the target of 3% as per FRBM Act (2003). But, during 2008-09, it resorted to massive increase in spending, most of it on subsidies. This led to the deficit zooming to a high of 6% of GDP and its attendant adverse impact on all macro-economic parameters such as inflation, debt, interest rates, current account deficit etc. Modi dispensation must avert a repeat of such a scenario.
The government should stick to the roadmap laid down by the committee. It should also retain the requirement of presenting status reports (read: MTFPS/MEFS) – an absolute must to ensure accountability. As regards, exigencies/unanticipated fiscal situations, it can go for special sanction from the parliament – a leeway allowed by the committee.
Team Modi adhered to fiscal discipline during first three years of its term when the benefits of structural reforms namely GST and demonetisation were not available. Now, when these have started accruing, non-adherence to discipline midstream will not only be imprudent but also send a wrong signal.
(The writer is a New Delhi-based policy analyst)
http://www.deccanherald.com/content/661925/fiscal-roadmap-abandoned-midstream.html