Background
- After the presentation of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 and the related FRBM Rules in 2004, the target fiscal deficit to GDP ratio of 3% for the Union government was achieved only once, in 2007-08, when it was 2.5%.
- The FRBM Act was amended twice, in 2012 and 2015.
- The revisions in 2015 shifted the date for achieving the 3% target to 2017-18.
- By this year, the amended revenue deficit target was put at 2% of GDP.
Resetting the framework
- Budget 2018-19 has proposed amending the FRBM Act again, which will shift the target of 3% fiscal deficit-GDP ratio to end-March 2021.
- But on the bench there was no target set for revenue deficit.
- The new statutory anchors relate to the general and Central government debt-GDP ratios that are to be reduced to 60% and 40% of GDP, respectively, by 2024-25, based on the recommendations of the report by the FRBM Review Committee.
- Missing the fiscal responsibility targets year after year and changing the statutory framework time and again bring the credibility of the government’s commitment to fiscal discipline in the spotlight.
- As per the requirement of the FRBM Act of 2003, and amended in 2015, a medium-term fiscal policy statement has been presented by successive governments in each Budget, setting three-year rolling targets for fiscal, revenue, and effective revenue deficits and outstanding debt of the Central government.
- The average rate or margin by which different governments have reduced the fiscal and revenue deficits relative to GDP has been quite low.
- The current Budget has retained the fiscal deficit at 3.5% of GDP, missing the budgeted target of 3.2% which was itself a deviation from the stipulated target of 3% for 2017-18 in the amended FRBM Act.
- A slippage margin of 50 basis points implies a delay in reaching the target by two and a half years given the average margin of reduction of 0.2 percentage points per year.
- In the absence of improvement in the fiscal deficit level in 2017-18, the debt-GDP ratio has increased to 49.1% in 2017-18 from 48.7% in 2016-17 rather than falling, which was the trend until recently.
Diluting recommendations
- In the proposed amendment to the FRBM Act, key recommendations of the review committee were not accepted.
- It had wanted the target at which the fiscal deficit to GDP ratio was to be stabilised set at 2.5%. The government apparently continued with the 3% target.
- It had specified a revenue deficit glide path, reaching 0.8% by 2022-23. This too was not accepted.
- The target of revenue account balance is well recognised in the so-called ‘golden rule’ wherein a country may borrow as long as the entire borrowing is spent on capital spending. This can only be achieved by keeping the revenue deficit to zero.
- 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.
- Central government did not accept another recommendation of setting up a fiscal council, which could independently examine the economic case and justification for deviating from the specified targets.
- Fourth, in the committee’s recommendations, the debt-GDP levels of 60% and 40% of GDP for the general and Central governments, respectively, were to be achieved by 2022-23. These target dates have been shifted to 2024-25.
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