STATSGURU: BS analyses the new fiscal regime

STATSGURU

TOWARDS THE end of the 1990s, there was a steady build-up in general government (Centre and states) debt in India. But, as seen in Chart 1, this upward trend reversed in the middle of the previous decade, with the government adopting the Fiscal Responsibility and Budget Management Act (FRBM), 2003.

Despite this, India continues to have one of the highest debt burdens among the emerging economies. As seen in Chart 2, general government debt in India currently stands at 67.3 per cent of the gross domestic product, compared to the emerging market average of 39.9 per cent.

The expert committee, formed to review the FRBM Act, has now recommended to bring this down to 60 per cent (40 per cent for the Centre and 20 per cent for states) by 2023 from 67.3 per cent currently.

This road map, as Chart 3 shows, entails bringing down the Centre’s debt from 49.4 per cent in FY17 to 38.7 per cent by FY23. This is only marginally lower than the debt level under the current road map.

The committee has also recommended the Centre reduce its fiscal deficit to 2.5 per cent of GDP by FY23 as shown in Chart 4, as opposed to the current three per cent.

This debt trajectory implies that the onus of cutting general government debt lies squarely with the Centre. State debt is already at 21 per cent and is projected to rise in the coming years. Just to maintain its current debt level, states will have to cut their fiscal deficit annually by 0.16 per cent till FY25.

Arvind Subramanian, chief economic advisor, and a member of the committee, has raised objections on “arbitrary” targets for debt and the fiscal deficit. Instead, in a dissent note, he argued in favour of adopting the primary deficit (fiscal deficit minus interest payments) as the anchor. As shown in Chart 6, India is an outlier on this indicator.

Though this approach would give the government greater fiscal room, other members of the committee have argued that a reduction in the primary deficit is neither a necessary nor a sufficient condition for a decline in debt ratios.