With a little more than a week before Finance Minister Arun Jaitley presents the Budget, the N.K. Singh panel submitted its report on revising the Fiscal Responsibility and Budget Management Act to Mr. Jaitley.
The five-member committee — including Reserve Bank of India Governor Urjit Patel, former Finance Secretary Sumit Bose, Chief Economic Advisor Arvind Subramanian, and National Institute of Public Finance and Policy Director Rathin Roy — was constituted in May 2016 following Mr. Jaitley’s announcement, in Budget 2016-17, of the creation of a panel to review the Fiscal Responsibility and Budget Management Act.
“The Fiscal Responsibility and Budget Management (FRBM) Committee headed by N.K. Singh, former Revenue and Expenditure Secretary and former Member of Parliament presented its report to the Union Finance Minister Arun Jaitley today in his office in North Block in the national capital,” the government said in a statement on Monday. “The Government will examine the report and take appropriate action.”
“The context of the committee was that India’s FRBM for the centre and the states had fixed, rigid targets for the fiscal deficit that were to be achieved and sustained over the medium term,” DK Srivastava, Chief Policy Advisor at EY India said. “This was done in the context of high debt to GDP levels, and the idea was once discipline is enforced this ratio would fall.”
“This has happened, with the debt-GDP ratio lower than it was,” Mr Srivastava added. “Now that it is lower, there is a time to respond to the inherent cyclicality of the economy. Many countries have a system of flexibility in fiscal targets, such that in a slowdown it can borrow more than the average, provided it borrows less than average during expansionary phases.”
Fiscal management becomes all the more important post-demonetisation and the resultant slump in consumption expenditure, according to experts. The view is that the government could be tempted to increase public spending to boost consumption.
“In this context, the review committee’s recommendations might be very important,” Mr Srivastava said. “If they recommend flexibility… We must wait and see if the committee has recommended the flexibility and the attended conditions and the range.”
Regarding when the FRBM report will be made public, Mr Singh told The Hindu that “it entirely depends on the government whether they wish to make it public at all”. “The first decision is to decide whether this is an input in the Budget or not,” he said. “If it is, then it will be made public post-Budget. If it is not, then it depends on them when they want to make it public.”
Mr Jaitley will present the Budget for 2017-18 on February 1.
Mr Singh explained that the first volume of the report dealt with the issues of fiscal policy, fiscal roadmap, international experience and the recommendations on these issues.
“Volume 2 is on the international experience, Volume 3 deals with the Centre and states, and Volume 4 incorporates papers by lots of experts,” Mr Singh said. “This will make a difference to the quality of debate.”
While ratings agencies do look at the fiscal discipline of a country when considering them for a ratings upgrade, Mr Srivastava said that they also look at the context and the growth rate of the economy, so the decision will not be a myopic one based only on the fiscal and revenue deficits.
The government has set a fiscal deficit target of 3.5% of GDP for FY17, a lower target than the 3.9 per cent set for 2015-16, which was achieved.
During his Budget speech in 2016, Mr Jaitley said: “There is now 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. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, respectively, in the economy.”