Backing the basic tenets of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, economists in the finance ministry said the Centre should maintain fiscal prudence by committing to a new fiscal road map that focuses on reduction of debt-to-GDP ratio and incentivising states to remain on the fiscal consolidation path.
They said India’s economic experience underscored that fiscal activism embraced by advanced economies, giving a greater role to counter-cyclical policies and attaching less weight to curbing debt, is not relevant for India.
India’s general government debt to GDP ratio at 68.5% in 2016 is one of the highest among emerging market economies: South Africa (51.7%), China (46.3%) and Indonesia (27.5%).
Of India’s general government debt, the Centre contributed 48 percentage points. “That is why the path of fiscal prudence embarked upon by this government is critical in itself but also as a model for the states,” according to the Economic Survey tabled in Parliament on Tuesday.
NK Singh-led FRBM Review Committee, in which chief economic adviser Arvind Subramanian was also a member, submitted its report to finance minister Arun Jaitley last week.
“The (FRBM) operational framework designed in 2003 will need to be modified to reflect the India of today, and even more importantly the India of tomorrow,” the Survey noted.
The panel is understood to have recommended a cap on the country’s general government debt in relation to GDP, along with the existing ceilings on the fiscal deficits of the Centre and states.
However, it is learnt to have voted against bringing down the fiscal deficits of Centre/states to below 3% of the GDP in the near term, citing the government’s obligation to pump-prime the economy.
Subramanian, the key author of the Survey, is understood to have said in a dissent note to the FRBM panel that India should target primary deficit (PD), not fiscal deficit.
The Survey also flagged PD as a key vulnerability of India compared to other emerging economies.
A reduction in primary deficit — fiscal deficit minus interest payments — is reflective of the government’s efforts at bridging the fiscal gap during a financial year.
India runs a primary deficit which is projected to come down to 0.3% of the GDP in FY17 from 0.7% in FY16 and 0.9% in FY15. “Put simply, India’s government (the Centre and states combined) is not collecting enough revenue to cover its running costs, let alone the interest on its debt obligations,” the Economic Survey stated.
While the Centre could unveil a flexible fiscal deficit road map in the Budget on Wednesday, the Survey said the government pay rises and muted tax receipts could put pressure on the fiscal deficit in FY18.
The Centre is expected to achieve FY17 fiscal deficit target of 3.5%, thanks to buoyancy in excise duty and service tax receipts.
State government finances are also under stress. The consolidated deficit of the states has increased steadily in recent years, rising from 2.5% of the GDP in FY15 to 3.6% of the GDP in FY16, in part because of the UDAY scheme. Markets are anticipating some slippages in FY17 as well, on account of the expected growth slowdown, reduced revenues from stamp duties, and implementation of their own Pay Commissions.