A committee tasked with redrawing the fiscal consolidation roadmap has recommended a cap on the country’s general government debt in relation to the gross domestic product (GDP) along with the existing ceilings on the fiscal deficits of the Centre and states. However, in its four-volume report — A Responsible Growth, Debt and Fiscal Framework — presented to finance minister Arun Jaitley on Monday, the committee, headed by NK Singh, is learnt to have voted against bringing down the fiscal deficits of Centre/states to below 3% of GDP in the near term, citing the government’s obligation to pump-prime the economy.
While recommending an overhaul of the 13-year-old Fiscal Responsibility and Budget Management (FRBM) Act that saw many amendments since its birth, the panel stressed that the increments to outstanding public debt could be curbed by raising the share of growth-inducing expenditure and elimination of revenue deficit. The committee’s proposals are expected to find their way to the forthcoming Union Budget.
Bank of America Merrill Lynch said in a report that the Singh committee proposed building cyclicality in setting fiscal deficit projections by switching to a target range (3-3.5%) from a point target of 3%. However, FE could not verify this.
India’s consolidated fiscal deficit of the Centre and states is seen at about 7% of the GDP at present; this is one of the highest among G20 countries, with the exception of outliers the US and Japan (see chart). The Centre’s fiscal and revenue deficits in FY17 are projected to come down to 3.5% and 2.3%, from 3.9% and 2.5% (revised estimates), respectively, in FY16.
The CAG has recently noted that the fiscal deficit was actually higher at 4.3% last year, while endorsing the revenue deficit figure.
As per the roadmap laid out by the 14th Finance Commission (FFC), the Centre’s fiscal deficit was to reduce to 3% in FY17 and remain at that level for subsequent years, but the Centre had, in Budget FY16, said that the 3% target would be achieved in FY18. However, while the Centre is likely to achieve the FY17 deficit target of 3.5% riding on revenue buoyancy, the demonetisation pangs could derail the plan for next fiscal. According to a State Bank of India Research report, “The demonetisation has changed the entire gamut of the economy. We are pegging in a fiscal deficit target of Rs 5.75 lakh crore for FY18, at 3.4% of GDP. We are convinced that the government must shift its fiscal objective.”
In case of states, the FFC has said that their fiscal deficit must be anchored to an annual 3% of gross state domestic product but said that subject to conditions including one on debt-GSDP ratio, the maximum deficit could be 3.5%. As per FY16 state budgets, gross fiscal deficit of states were to reduce to 2.4% of GSDP in FY16 (from 2.9% in the previous year) and they were to produce a revenue surplus, equal to 0.4% of GDP. But there were considerable slippages from these targets; the states’ deficit could widen further in the current year owing to the UDAY scheme for debt-laden state-run power distribution companies.
Recently, Reserve Bank of India governor Urjit Patel, also a member of the Singh committee, stressed the need to control general government debt to GDP ratio. Borrowing more and pre-empting resources from future generations by governments could not be a short cut to long-lasting higher growth, he said, adding that structural reforms and reorienting government expenditure towards public infrastructure would result in durable gains on the growth front.
Former RBI governor Raghuram Rajan too had said growth multipliers on government spending were likely to be much smaller than presumed and noted that more spending could hurt debt dynamics, a key yardstick for global credit rating agencies.
The NK Singh panel, sources said, felt that substantial part of the fiscal deficit — the excess of total expenditure over non-debt receipts — should be used to impart momentum to government capex and help capital formation in the private sector.
Singh told reporters that the first volume of the report addresses the issue of the fiscal policy, fiscal roadmap, international experience and recommendations therein. Volume two, he said, refers to international experience in which “we got presentations from a lot of organisations particularly OECD, the World Bank, the ILO”. The third volume, Singh said, deals with Centre-state issues and the fourth is a compilation of views expressed by “domain experts”. Singh said: “We have had FRBM reports but the issue of debt had remained somewhat unaddressed.” Though the Singh panel was initially asked to examine the need and feasibility of having a “fiscal deficit range” as the target in place of the existing fixed numbers (percentage of GDP) as the goal, its terms of reference were later enlarged to include a review of the recommendations of the FFC and Expenditure Management Commission on strengthening the institutional framework on fiscal matters.
Other members of the five-member committee are former finance secretary Sumit Bose, chief economic adviser Arvind Subramanian, and National Institute of Public Finance and Policy director Rathin Roy.