Central govt may opt for fiscal deficit band

Tags: Policy

The Modi government finds the fixed target regime dictated by the FRBM Act of 2003 too restrictive

The Narendra Modi government is likely to abandon the fixed fiscal deficit target regime and shift to a band to give itself flexibility to undertake extra spending to stimulate growth in the times of slowdown.

The fixed target regime dictated by the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 is found too restrictive by the government.

According to sources, the committee led by former revenue and expenditure secretary NK Singh, which is tasked by the government to review performance of the FRBM Act, has found range-bound fiscal deficit target a workable idea and the finance ministry has also endorsed it. The panel’s finding was discussed with the finance ministry recently, sources added.

The committee, which was supposed to submit its report by October end, has been given 20-day extension to complete its work. However, when contacted, finance secretary Ashok Lavasa said that no final decision has yet been taken on changing fiscal deficit target.

According to analysts, the range-bound target will give the Centre and states flexibility to step up spending during slowdown when demand is weak. Similarly, public expenditure can be reduced when the economy is doing well.

But at the same time, the proposed change in the fiscal target regime may not go down well with international credit rating agencies that use fiscal deficit as a key parameter while deciding sovereign ratings, analysts add.

A band for fiscal deficit, instead of a point estimate, will help the government take counter-cyclical at the time of adverse economic situation. However, a prolonged phase of high deficit is likely to be counter-productive for the economy, said Devendra Pant, chief economist at India Ratings and Research.

The Centre has targeted to restrict fiscal deficit to 3.5 per cent in 2016-17. However, it might not be easy for it to meet the target if proceeds budgeted from disinvestment are not realised. The implementation of the seventh central pay panel award has created additional responsibility of over Rs 1 crore a year for the Centre.

The proposed shift to the band will also provide a big relief to states who have been complaining of the lack of fiscal headroom due to the restrictive nature of the FRBM Act.

States’ common grouse has been that they cannot borrow without the Centre’s permission and so have to stick to the target but the Centre has not been so strict in adherence to FRBM target.

The Centre’s deficit declined initially – from 3.9 per cent of GDP in 2004-05 to 3.1 per cent in 2007-08 (including unpaid subsidy bills) – but in 2008-09, it exploded to 6 per cent of GDP (8 per cent, if unpaid subsidy bills are included).



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