FRBM panel’s targets ‘arbitrary’, says CEA Arvind Subramanian in dissent note

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New Delhi | April 12, 2017 9:38 PM

Terming fiscal deficit targets suggested by the FRBM panel "arbitrary", Chief Economic Adviser Arvind Subramanian has said adherence to them will aggravate "booms and busts" to the detriment of the economy.

Chief Economic Adviser Arvind Subramanian. (Source: IE)

Terming fiscal deficit targets suggested by the FRBM panel “arbitrary”, Chief Economic Adviser Arvind Subramanian has said adherence to them will aggravate “booms and busts” to the detriment of the economy. “…the new architecture would be a corset on fiscal policy, resulting in extreme procyclicality — aggravating booms and busts — with adverse effects on the economy,” he said in his dissent note to the Fiscal Responsibility and Budget Management (FRBM) Review Committee report.

The panel, headed by former Revenue Secretary N K Singh, has suggested that fiscal deficit should be brought down to 2.5 per cent of the GDP by FY23 in a phased manner. It has also suggested targets for revenue deficit and debt to GDP ratio.

Besides, the five-member panel recommended setting up of a Fiscal Council for policy guidance to the government for meeting the fiscal deficit target.

“There is a problem (with the targets) because multiple targets force policymakers to aim at too many, potentially inconsistent objectives and analytical frameworks, running the risks of overall fiscal policy being difficult to communicate for the government and comprehend for market participants,” he said.

Moreover, these targets “themselves are arbitrary”, Subramanian said in his dissent note. He said the focus should be on the primary deficit until the fiscal deficit is entirely eliminated.

“This strategy will ensure that debt will remain on a downward path even over the longer term, when India’s debt dynamics turn less favourable,” he said.

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He suggested that there should be one target, a steady glide path that eliminates the general government primary deficit within five years.

“This would ensure a declining debt trajectory, which would reassure investors and ensure that India’s debt remains sustainable even when India’s debt dynamics turn less favourable in the medium term.

“And this escape clause should have a more reasonable growth trigger that allows for some relaxation of the deficit targets during recessions, and some tightening of these targets during booms,” he said. Such a simple, clear, and consistent architecture would truly be an FRBM for the 21st century, he added.

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