Equity in debt

The expert panel’s recommendation to review the fiscal responsibility law is timely

The advice of the expert committee to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 requires attention, given India’s track record. This is all the more so given the born-again political conviction that promises of random largesse to voters is just fine. Excessive and unsustainable borrowing by the government is obviously perverse as it entails a cost on future generations while crowding out private investment. In the past, fiscal irresponsibility has cost jobs, spiked inflation, put the currency in a tailspin and even brought the country to the brink of a default. The possibility of default may have resulted in the liberalisation of the economy in 1991, but the key trigger was irrational public spending on borrowed money in the late-1980s. Less than a decade later, with fiscal discipline faltering and the deficit shooting up to 10% of GDP, the FRBM law was enacted to ‘limit the government’s borrowing authority’ under Article 268 of the Constitution. But the target to limit the fiscal deficit to 3% of GDP (by 2009) was abandoned after the 2008 global financial crisis as a liberal stimulus reversed the gains in the fiscal space, creating fresh macro-level instability. The FRBM Act’s deficit target is now only likely to be met next year.

Such damage transmissions from the political economy to the real economy need to be checked forthwith. The committee’s proposal to maintain the 3% target till 2019-20 before aiming for further reduction is pragmatic, as the ‘extraordinary and unanticipated domestic development’ of demonetisation happened during its tenure. Such an event, the committee has said, could trigger an escape clause from fixed fiscal targets in its proposed rule-based framework. Instead of focussing purely on the fiscal and revenue deficit numbers, which should be brought down to 2.5% and 0.8% of GDP respectively by 2023, the panel has called for paring India’s cumulative public debt as a proportion to GDP to 60% by 2023 — from around 68% at present. The latter, a simpler measure for solvency purposes, should inspire confidence among rating agencies. Though this has put paid to the government’s hope that a fiscal deficit range could be targeted instead of absolute numbers, the Finance Minister has committed to the 3% target for the next two years, from the 3.2% target for 2017-18. A clear fiscal policy framework in tandem with the monetary policy framework already adopted could act as a powerful signal of commitment to macroeconomic stability. The Centre must swiftly take a call on the panel’s recommendations — including for a new debt and fiscal responsibility law, and the creation of a Fiscal Council with independent experts that could sit in judgment on the need for deviations from targets. It is equally critical that States are brought on board, as the 60% debt target includes 20% on their account. Their finances are worsening again even as the clamour for Uttar Pradesh-style loan waivers grows.

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