OPINION

Review the fiscal consolidation path

Passed almost three years after it was first introduced in Parliament, that too in a significantly watered down form, the Fiscal Responsibility and Budget Management Act has faced a rocky road in terms of implementation. Paused four times since its enactment in August 2003, including for a reset of the fiscal deficit target in 2008-09 following the global financial crisis, the FRBM Act has become a subject of animated debate. Central to this has been the question of whether the law has served the purposes for which it was envisaged. There is no denying that the Act has helped focus attention on the issues relating to fiscal consolidation — thanks to the mandatory medium-term and strategy statements that the government of the day is required to present annually before Parliament. But with regard to the larger objective of ensuring macro-economic stability, the record has been less than ideal. Both headline consumer price inflation and the debt-servicing costs for the Central government were, at different points in the post-FRBM era, at divergence with the performance of fiscal deficit, raising questions about the over-emphasis on a cast-in-stone target number. The nub of the issue is this: has the law allowed the government the elbow room needed to use all the fiscal tools at its command to ensure that the growth momentum is maintained, without either significantly fuelling inflation or curtailing spending on vital and socio-economically relevant development programmes? If it has not, this may be the time to review the Act, and if necessary, amend it significantly.

It is in this context that Finance Minister Arun Jaitley’s Budget proposal to have a committee review the implementation of the FRBM Act — even as he committed himself to sticking to the 3.5 per cent fiscal deficit target for the next financial year — is timely and germane. He has referred, for instance, to the possibility of adopting a target range rather than a specific number. The argument is that this would give the necessary policy space to deal with dynamic and volatile situations such as the one India currently faces — global economic and financial market uncertainty, a slowdown in China, and tepid private investment demand domestically. The suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, as mentioned in the Budget speech, is worth exploring. While any attempt to jettison or even revisit the fiscal deficit targets is bound to draw sharp criticism from, among others, the global credit rating agencies, Mr. Jaitley has to look no further than the BRICS compatriot China. Chinese Premier Li Keqiang has just unveiled a budget deficit of 3 per cent of GDP, the highest level for that country since 1979 and a significant jump from last year’s 2.3 per cent target. But Mr. Jaitley will need to ensure that any resources freed up from a fiscal reset, when that happens, are spent imaginatively for an economic stimulus, and primarily on the creation of long-term public assets.

Recommended for you