Mod­ify FRBM Act but Avoid Ac­tivism, Says Eco Sur­vey

Sur­vey says op­er­a­tional frame­work of law needs to be mod­i­fied ‘for In­dia of to­day and tomorrow’

The Economic Times - - Economy: Macro, Micro & More - Our Bureau

New Delhi: The Eco­nomic Sur­vey has called for mod­i­fy­ing the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment Act, 2003 (FRBM Act) to pro­vide fis­cal pol­icy direc­tion for "the In­dia of tomorrow", but cau­tioned against fis­cal ac­tivism adopted by the western world to prop their economies.

The coun­try's eco­nomic ex­pe­ri­ence shows that the fis­cal ac­tivism em­braced by ad­vanced economies — giv­ing a greater role to counter-cycli­cal poli­cies and at­tach­ing less weight to curb­ing debt — is not rel­e­vant for In­dia, said the pre-Bud­get doc­u­ment fi­nance min­is­ter Arun Jait­ley tabled in Par­lia­ment on Tues­day.

It said the coun­try's fis­cal ex­pe­ri­ence has un­der­scored the fun­da­men­tal va­lid­ity of the fis­cal pol­icy prin­ci­ples en­shrined in the 13-year old FRBM Act.

How­ever, even as the ba­sic tenets of the Act re­main valid, the op­er­a­tional frame­work needs to be mod­i­fied "for the fis­cal pol­icy direc­tion of In­dia of to­day, and even more im­por­tantly the In­dia of tomorrow", the sur­vey said.

“This set­ting out a new vi­sion through an FRBM for the 21st cen­tury will be the task of the FRBM re­view com­mit­tee," it said.

Since the 2008-09 global fi­nan­cial cri­sis (GFC), fis­cal pol­icy in­ter­na­tion­ally has seen a par­a­digm shift from the em­pha­sis on debts to deficits, ar­gu­ing for greater ac­tivism in flows (deficits) and min­imis­ing con­cerns about sus­tain­abil­ity of the stocks (debt), the Sur­vey said.

"But In­dia's ex­pe­ri­ence has reaf­firmed the need for rules to con­tain fis­cal deficits, be­cause of the pro­cliv­ity to spend dur­ing booms and un­der­take stim­u­lus dur­ing down­turns," it added.

Point­ing out that In­dia's ex­pe­ri­ence has also high­lighted the dan­ger of re­ly­ing on rapid growth rather than steady and grad­ual fis­cal and prima-

This set­ting out a new vi­sion through an FRBM for the 21st cen­tury will be the task of the FRBM re­view com­mit­tee, says sur­vey

ry bal­ance ad­just­ment to do the 'heavy lift­ing' on debt re­duc­tion, the Sur­vey said this “has un­der­scored the fun­da­men­tal va­lid­ity of the fis­cal pol­icy prin­ci­ples set out in the FRBM”. The Sur­vey's ob­ser­va­tions as­sume sig­nif­i­cance as N K Singh­headed panel last week sub­mit­ted its four-vol­ume re­port on mod­i­fy­ing the FRBM Act to Jait­ley. The five-mem­ber panel was tasked to re­view the FRBM Act in view of sug­ges­tions that there should be a broad range for gov­ern­ment's fis­cal deficit in place of the cur­rent prac­tice of hav­ing a fixed tar­get. “The gov­ern­ment will ex­am­ine the FRBM com­mit­tee re­port and take ap­pro­pri­ate ac­tion," the fi­nance min­istry had said.

While an­nounc­ing the in­ten­tion of the gov­ern­ment to set up a com­mit­tee to ex­am­ine the FRBM Act, Jait­ley in his last bud­get speech had said "there is a school of thought which be­lieves that in­stead of fixed num­bers as fis­cal deficit tar­gets, it may be bet­ter to have a fis­cal deficit range as the tar­get, which would give nec­es­sary pol­icy space to the gov­ern­ment to deal with dy­namic sit­u­a­tions".

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