One of the most laudable achievements of Modi – government is its sticking to the fiscal consolidation road-map. Thus, even as it stuck to fiscal deficit [FD] target of 3.9% of GDP during 2015-16, for current year also, it has set an ambitious target of 3.5%. For 2017-18, it aims at lowering it further to 3.0%.
In this backdrop, it was rather intriguing for finance minister, Arun Jaitely announcing [budget speech for 2016-17], the government’s intent to review Fiscal Responsibility and Budget Management [FRBM] Act with a view to make the target flexible. He was alluding to make it range bound instead of a fixed number as has been the position hitherto under the extant Act in vogue since 2003.
Since then, a committee under Mr NK Singh, former secretary, Government of India [it includes among others, Arvind Subramanian, chief economic adviser and U Patel, deputy governor, RBI] has been set up to examine this issue. The committee is expected to submit its recommendations by October, 2016.
Having triggered a debate, there is no escape from running through the motion. But, the very idea of setting target within a range say 3.0-3.5% is ‘self-defeating’.The governments are generally prone to spend more than what they can support within available means. The objective of bringing them under FRBM is to rein in such tendencies which will be nullified if the target itself gives them a leeway.
Faced with a range, even the most discerning government would at best aim at complying with the upper end [3.5% in above example]. Transpose on this further flexibility which sovereign governments de facto appropriate to themselves [unlike an individual or a corporate entity, they always manage to exceed the target in the name of larger public good], then you have lost the race even before it begins.
Despite doing a brilliant job conforming to fiscal consolidation road-map [with a fixed number target for FD] for 2 years in a row and well poised to achieve during the current year too, what prompted the finance minister to move tangentially off? Why is he giving confusing signals by offering liberal dispensation to future governments at the center as well as to the states?
The trigger may be his concern that continuing with fixed number target may come in the way of government’s efforts to pump prime investment in infrastructure viz., roads, highways, railways, port, airport etc and other public sector projects at a time when investment in private sector is mute and the economy needs a booster dose. This is without any basis if one goes by the experience of last 2 years.
During both 2014-15 and 2015-16, private investment was mute and yet the economy registered an impressive growth of 7.3% and 7.6% respectively. This was facilitated by government’s reform initiatives that helped in bringing foreign investment on the one hand and its own booster dose to public investment on the other. And, all this happened without compromising on fiscal discipline.
The government has garnered a huge chunk of resources by implementing reforms in subsidy management and plugging leakages in execution of a plethora of welfare schemes. By making payments via direct benefit transfer [DBT] route, it has succeeded in eliminating millions of bogus beneficiaries under subsidy on LPG, food, kerosene, pension and payments under Mahatma Gandhi National Rural Employment Guarantee Act [MGNREGA]
These resulted in savings of Rs 36,500 crores during the last two years. According to prime minister, this is just touching the surface and once the government goes full blast unearthing mis-appropriated/embezzled funds from beneath it, the savings would be monumental. According to officials, putting the entire food subsidy under public distribution system [PDS] and MGNREGA payments under Aadhaar-based system alone would save about Rs 100,000 crores annually.
On the revenue front also, the government is expected to consolidate the gains on tax buoyancy achieved in last two years. The projected acceleration in growth [to even double digits as alluded to by Jaitely], implementation of Goods and Services Tax [GST], measures to excavate black money and incorporate into the economic mainstream should result in quantum jump in tax collections in times ahead.
During 2015-16, the government got a bonanza by way of saving in oil import bill [courtesy, steep decline in price of crude oil] and resultant savings in subsidy on LPG and kerosene. There is a lingering doubt that this buffer may not be available when oil price rebounds [already since January, 2016, the price has increased by 50%]. But, that loss will be more than offset by the mammoth resources garnered from plugging leakages and higher tax collection.
A reason often cited by experts in support of a flexible target is what they euphemistically describe as reinforcing the “counter-cyclical” objectives. In simple term, when economy is on a downswing, then, a major investment initiated by the government can help moderate its effect thereby preventing surge in unemployment and declining incomes. Some leeway in FD target will help in this endeavor.
An economy that is structurally transformed and reforms fully embedded in the systems [that indeed is the direction Modi is taking us] will have in-built resilience to cope up with such situations. It won’t need the dose of excessive borrowings or mere printing of currency notes [that a range bound FD target would imply] to keep up the momentum of growth. On the other hand, risks of giving this flexibility are real.
For instance, even as FD at 2.5% of GDP during 2007-08 was well within the target of 3% as per FRBM Act [2003], during 2008-09, the then UPA government resorted to massive increase in spending most of it going in to un-productive channels including subsidies. This led to FD zooming to a high of 6% and the country is still saddled with its adverse fall-out in terms of high inflation, high interest rates, economic slow down and loss of jobs.
In view of above, there is absolutely no basis for the government to deviate from the extant dispensation of having a fixed number target under FRBM. Any dilution at this juncture will only give a wrong signal that Modi – regime is not confident about continuing its reforms agenda and its achievements. Besides, it may even sow the seeds of leniency in budgetary management for its successor government post-2019 [in the event of a change].
Doing so will also send a wrong message to states who are prone to be profligate spending too much money on distributing doles. Tamil Nadu is a classic example where during the last one decade, chief minister has spent over Rs 10,000 crores on giving freebies; the poll promises made by Jailalithaa in recent assembly elections will cost state exchequer thousands of crores. Other states compete with each other handing out almost every household item free. A flexible target under FRBM will only exacerbate such practices.
Therefore, the government must not abandon its current approach of having a fixed number FD target under FRBM. The scenario of inescapable slippages [due to circumstances beyond control] can be tackled by seeking waiver of the limit from the parliament. It should also aim at zero revenue deficit [the 2003 Act required this to be achieved by 2008] as spending on current consumption more than what it earns is abhorrent and totally unacceptable.