FRBM panel sets 2.5% fiscal deficit target by FY23
Panel has provided for ‘escape clauses’ for deviations in fiscal deficit up to 0.5 per cent
The committee asked by the government to review the Fiscal Responsibility and Budget Management (FRBM) Act has recommended a fiscal deficit target of 2.5 per cent of gross domestic product (GDP), a revenue deficit of 0.8 per cent and a combined Centre-states debt ceiling of 60 per cent for financial year 2022-23, end point of its six-year, mediumterm, fiscal road map.
These and other recommendations form part of a draft debt management and fiscal responsibility legislation. If the government accepts this, it would replace the existing FRBM law.
The panel was headed by N K Singh, a former revenue and expenditure secretary to the Union government, and also a former Member of Parliament. Its suggestions, given earlier to the government, were made public on Friday.
To provide flexibility for policymakers within the fiscal framework it has recommended, the panel has suggested a steady target of three per cent of GDP for the deficit between FY18 and FY20. And, has recommended some ‘escape clauses’ to allow the government to deviate from the schedule by 0.5 percentage points in any year.
It suggests a ‘fiscal council’, an independent body, be established for monitoring the government’s fiscal announcements, providing its own forecasts and analysis, besides advising the finance ministry on triggering the escape clauses.
“The maxim that ‘you cannot spend your way to prosperity’ is now widely accepted. Fiscal policies must, therefore, be embedded in caution than exuberance; in restraint than profligacy,” the committee states in the opening lines of its report.
“The committee recommends a path of medium-term consolidation, where the fiscal deficit is envisaged to be on a glide path, to be reduced to 2.5 per cent of GDP, consistent with reducing the Centre’s debt to 40 per cent, by FY23,” the panel said. For the states, it envisages a combined debt at 20 per cent of GDP.
The report also contains a lengthy note of dissent from the government’s Chief Economic Advisor, Arvind Subramanian, a panel member. It states the focus of policymakers should be on reducing the primary deficit, rather than the fiscal deficit. And, in what could be a first, the other panel members have authored a rejoinder to Subramanian’s note.
The other members were former finance secretary Sumit Bose, Reserve Bank of India (RBI) Governor Urjit Patel and Rathin Roy, head of the National Institute of Public Finance and Policy. The panel had given its report to Finance Minister Arun Jaitley before the 2017-18 Union Budget.
“The FRBM Committee has had detailed discussions with experts and shareholders. We have put the report out for feedback and consultation from the public,” Finance Secretary Ashok Lavasa told reporters on Wednesday. “We will examine the recommendations and take a decision.”
“Next-generation frameworks are characterised by institutional development and some degree of fiscal flexibility to respond to shocks. The latter is incorporated under an ‘escape clause’ wherein temporary and moderate deviations from the baseline fiscal path are permitted under exceptional circumstances and in reaction to external shocks,” the panel said, justifying its recommendation of escape clauses.
To ensure these are not misused by a government, it says these have been defined narrowly and specifically, unlike the existing FRBM law, wherein the definition of ‘exceptional circumstance’ was defined opaquely and was liable to misuse. The escape clauses, it said, were proposed for overriding considerations of national security like acts of war, calamities of national proportion and collapse of agriculture severely affecting farm output and incomes.
Also for “far-reaching structural reforms in the economy with unanticipated fiscal implications” and if a sharp decline occurs in real output growth of at least three percentage points below the average for four preceding quarters.
“The deviation from the stipulated fiscal deficit target shall not exceed 0.5 percentage points in a year,” the panel says. It adds that RBI chief Patel is in favour of not more than 0.3 percentage points. The clauses may be invoked after formal consultation and advice of the fiscal council, and if accompanied by a clear commitment to return to the original fiscal target in the ensuing financial year.
One of the original terms of reference given to the panel was to examine the feasibility of a fiscal deficit range. That has been rejected by it, saying most major economies do not have such a provision and flexibility has been provided by its recommendations in terms of escape clauses and holding of the deficit target at three per cent of GDP for three consecutive years.