The Centre can take a pause on the fiscal consolidation front over the next three years by maintaining a fiscal deficit to GDP ratio of 3% till 2019-20, the Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by former Revenue Secretary NK Singh has recommended.
Set up to comprehensively review and give recommendations on the FRBM roadmap for future, the panel has advocated reaching a fiscal deficit to GDP ratio of 2.8% in 2020-21, 2.6% the next year and 2.5% in 2022-23.
To put that in context, the government has set a fiscal deficit target of 3.2% of GDP in 2017-18, marginally better than the 3.5% clocked last year. The FRBM law enacted in 2003 had originally envisaged attaining a fiscal deficit of 3% of GDP by 2008-09, but amendments over the years had revised the year for achieving the same target to 2017-18.
Escape clauses
The panel has introduced escape clause triggers that can allow the government to skip the fiscal deficit target for a particular year, in situations that include national security concerns, acts of war, national calamities, a collapse of the agriculture sector and far-reaching structural reforms with unanticipated fiscal implications.
While the committee has recommended that deviations from the stipulated fiscal targets should not be more than 0.5%, the Reserve Bank of India governor Urjit Patel was not in favour of such a large deviation. Mr Patel, who was also a member of the panel along with Chief Economic Adviser Arvind Subramanian, was inclined to only permit a 0.3% deviation from the target.
The escape clause can also be triggered if real output growth in the economy slips by 3 percentage points from the average of the previous four quarters. A similar buoyancy clause has been proposed, so that fiscal deficit must fall atleast 0.5% below the target if real output grows 3% faster than the average of the last four quarters.
The panel has recommended that the existing FRBM Act and rules be scrapped and a new Debt and Fiscal Responsibility Act be adopted. It has also suggested the creation of a Fiscal Council that the government must consult before invoking escape clauses.
The Committee’s four-volume report was submitted to the government in late January, but the government made it public on Thursday and has sought comments till May 5.
