The demonetisation of high-value currency notes could be considered a far-reaching structural reform that triggers an escape clause from fiscal consolidation goals, as per the new fiscal management framework proposed by a high-level panel, said its chairman N.K. Singh. The four-volume report of the committee to review the Fiscal Responsibility and Budget Management (FRBM) Act has suggested the creation of a new Fiscal Council and a focus on public debt to GDP ratio. Edited excerpts from an interview:
You have sought a shift in focus to the debt to GDP ratio instead of just deficit percentages and the target of 60% debt to GDP by 2023 from the present level of about 68%. Are you effectively recommending a borrowing freeze?
First of all, if we do move in the direction of second-generation fiscal rules that advanced countries or successful emerging markets are following, this is the kind of a macro-economic fiscal anchor supported by operational fiscal deficit targets they are following.
This is something the rating agencies had also pointed out as an important ingredient, in considering any improvement in the country’s rating, during their presentations to us. So yes, it is true that we are recommending a reduction in the current debt to GDP number. But we believe that there is no need for a freeze on borrowing if the fiscal deficit path is followed in accordance to the plan we have proposed.
Of course, your question is important as we have to be concerned about the debt to GDP rate of state governments, because states will have to be equal partners. The most preferred entity for examining the issue of States’ debt should be the 15th Finance Commission and in fact, one of our recommendations is that its terms of reference should require a look at the issue of state debt — not only the overall level, but the distribution of debt across states and their capacities. State finances need equal attention.
If we do achieve these targets by 2023, what kind of impact do we expect on our global ratings?
Credit rating is a complex thing that is for credit rating agencies to decide. We must be guided by what we consider is the most beneficial route for macro-economic stability.
Now, the coupling of states in the fiscal framework with a clear monetary policy framework would be a very powerful signal for the international community. Rating agencies also would like to see such a public debt anchor.
We have preferred a rule-based architecture, not a discretionary regime.
That is why we have suggested the repeal of the present FRBM law and a new legislation called Debt and Fiscal Responsibility Act.
A rules-based framework seems to work across countries better than discretionary ones which may be liable to somewhat indiscriminate deviations.
We have found wherever a range of deficits is allowed, countries go to the top of the range.
Suppose we suggested 3%-4%, then more countries will operate at 4% than 3%. Most of us felt a fixed number would be better, and we recognised circumstances under which the government can deviate through the mechanism of escape clauses. So a degree of flexibility has been suggested.
One of the triggers for the escape clause, you have said, should be far-reaching structural reform with unanticipated fiscal implications. With the benefit of hindsight, would demonetisation qualify as such a trigger in your opinion?
That is for the government to interpret. Demonetisation certainly, by any reckoning, had far-reaching structural changes and its revenue consequences are also a bit uncertain. But that is for the government to examine. We have also said that the resort to escape clauses cannot be an automatic reaction. The Fiscal Council we have proposed would play an important role in judging and assessing the circumstances and the advice of the Council on the appropriateness of triggering the clause would be an important contributory factor. That firewalls the possibility of indiscriminate deviations that are not acceptable, if the government decides to constitute such a Council.
The RBI governor seems to disagree on the extent of such flexibility, which you have said could be up to 0.5% of GDP…
That’s a good point. The RBI governor preferred the total cap on the escape clauses to be 0.3% of GDP. His point was grounded in the fact that the deviation should be really minimal. On the other hand, the other committee members said that considering that the circumstances for deviations are so stringent and involve a wider disruption to the economy, the 0.5% number was more appropriate. That was the majority view even though we recorded that Dr. Urjit Patel preferred 0.3%. The circumstances include acts of war and natural disasters. So the quantum of the government’s response would need to be a fairly robust one.
The Chief Economic Advisor Arvind Subramaniam has given a dissent note and mooted a focus on primary deficit instead of arbitrary debt targets…
We have carried his dissent note and also included a detailed rejoinder in the report, so it presents the views of all members except Dr. Arvind Subramaniam. We felt it was neither a necessary nor sufficient condition to achieve the intended outcome. In fact, hardly any country is using that as a principal anchor.
How did you manage to make sure that the RBI governor’s difference of opinion didn’t turn into a dissent note?
That’s a very difficult question. But let me say that the overall atmospherics of this committee was very consensual. Everyone had different points of view that we sought to accommodate. The RBI governor was content that his point was recorded and didn’t feel the need to put a dissent note. On the other hand, the CEA had such a different view on the overall architecture of the report so we accepted that there would be a note of dissent.