Sparring on and with red ink: FRBM panel vs CEA

FRBM panel disagrees with CEA, a fellow member, on why and how to address deficits

Chief economic advisor (CEA) Arvind Subramanian has given a dissent note to the recommendations given by the panel reviewing the existing Fiscal Responsibility and Budget Management (FRBM) law. He suggests a focus on the primary deficit, rather than the “multiple” goals the others recommend. The primary deficit is defined as the fiscal deficit after excluding interest payments by the government.

Probably for the first time in a panel report, the others — former finance secretary Sumit Bose, Reserve Bank governor Urjit Patel, National Institute of Public Finance and Policy chief Rathin Roy and former expenditure secretary N K Singh (chairman) — gave a rejoinder to the dissent note of a fellow member.

The committee recommends the Centre aim to bring down its debt to 40 per cent of the country’s gross domestic product (GDP) by 2022-23. To do so, cut the fiscal deficit from three per cent of GDP in 2017-18 to 2.5 per cent by FY23. And, keep the deficit at three per cent of GDP for three years starting 2017-18.

Also, the revenue deficit should be targeted to come down from 2.05 per cent of GDP in the current financial year to 0.8 per cent in 2022-23. The combined Centre and states' debt should be targeted to come down to 60 per cent of GDP by 2022-23, the committee said.

To these main findings, the CEA has said: “There are multiple targets on stock, flow and composition, diffusing the focus, complicating communication and comprehension, and risking non-compliance.”

Subramanian said the targets of the majority are themselves arbitrary. “A 60 per cent debt-GDP rule cannot command broad consensus. Nor can a revenue deficit target of 0.8 per cent of GDP. And, the medium term fiscal deficit target of 2.5 per cent of GDP is based on a conceptual framework, is unrelated to the debt objective and is based on calculations that are hard to justify.”

Rather, Subramanian suggested a “simple and consistent architecture” that reflects India's fiscal realities of the past and its prospects for the future. And, this is based on only one target — a steady glide path that eliminates the primary deficit of Centre and states within five years.

“This would ensure a declining debt trajectory, which would reassure investors and ensure India's debt remains sustainable even when the debt dynamic turns less favourable in the medium term,” he said.

He also questions the panel's recommendation on the fiscal deficit path. “This follows an old sequence of cut sharply, pause and cut again, that is difficult to explain or justify.” This path, Subramanian said, is inappropriate in the short run because of cyclical considerations. And, insufficiently ambitious in the medium term in placing India's debt on a sustainable long-term trajectory.

The majority have also recommended an “escape clause”, whereby the targets could be deviated from if GDP growth is higher or lower by three percentage points than a recent trend. The CEA said this would lead to pro-cyclical policies, rather than countercyclical ones.