Government To Explore Setting Fiscal Deficit Range Under New Framework
The North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Government To Explore Setting Fiscal Deficit Range Under New Framework

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The government may take a different approach to fiscal policy in a revised version of the Fiscal Responsibility And Budget Management Act.

The government will consider targeting a range for fiscal deficit and in the coming days will debate whether to continue with debt as a target in the new framework or not, said a senior Finance Ministry official. The official said the government will aim to bring amendments to the Fiscal Responsibility and Budget Management Act, 2003, in the monsoon session of Parliament.

The FRBM law fixes targets on the government’s debt, fiscal deficits and revenue deficits.

The impact of the Covid-19 pandemic on the Indian economy has necessitated changes in the FRBM Act, Finance Minister Nirmala Sitharaman said in her Budget speech on Feb. 1. As part of the speech, Sitharaman said the government would aim to bring down the fiscal deficit to below 4.5% by FY26.

The pandemic has severely affected the government’s revenue collections, widening the gap between earnings and spending, leading to increased borrowings. Even though the government hasn’t officially stated the country’s debt-to-GDP ratio, it’s estimated to rise to near 90% in FY21.

The official cited earlier said the debt-to-GDP target of 60% by FY25 in the existing FRBM framework will not be met.

The higher debt trajectory could prove to be a bugbear for India’s sovereign rating. Fitch Ratings said on Feb. 10 the “debt-to-GDP trajectory is core to our sovereign rating assessment, meaning higher deficits and a slower consolidation path will make India’s medium-term growth outlook take on a more critical role in our analysis”.

Finance Commission’s Guidebook

In its report, the NK Singh-led Fifteenth Finance Commission has called for a “major restructuring” of the FRBM Act to recommend a timetable for defining and achieving debt sustainability. It has asked for a high-powered committee to be set up to review the fiscal goals.

The official, however, said the government hasn’t made up its mind yet on whether it wants to review the FRBM law through a committee or an internal review.

Keeping in mind the economic uncertainties, the commission has presented a range of scenarios for the fiscal deficit of the central government. Depending upon the course of economic recovery, the commission estimates fiscal deficit may be in the range of 3.5-4.5% by FY26.

Range Or No Range?

National Institute of Public Finance and Policy consultant Radhika Pandey said the Finance Commission’s report may serve as a guidepost for framing a new fiscal deficit glide path.

“The idea of going for a range for fiscal deficit is fine till the time there is an accountability towards the stated range. Considering the uncertain economic scenario and how it unfolds over time, it will be difficult to go for a point target,” Pandey said. “However, in case of a deviation, the government should transparently communicate the same to stakeholders.”

She emphasised the government shouldn’t dispense with a target for debt-to-GDP, which is intrinsically linked to fiscal deficit.

Fourteenth Finance Commission Member M Govinda Rao, however, had a different take. “If you set a range for targeting the fiscal deficit, the government will invariably stick to the higher end of the range which doesn’t make much sense,” he said. “The government should keep debt-to-GDP ratio as a target for which the fiscal deficit can be the anchor.”

The Fifteenth Finance Commission has estimated India’s debt-to-GDP ratio to be 89.8% in FY21 which will go down to 85.7% by FY26.

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