'Link fiscal deficit target to economic cycle'

Wants return to FRBM targets at the earliest.

The Economic Survey has suggested linking of the fiscal deficit target to the economic cycle when the Fiscal Responsibility and Budget Management (FRBM) Act is redrawn from April 2010.

Under this proposal, the Centre could run higher deficits when the economy is not doing well, but should compensate for it when the growth rate is higher.

“Examine the possibility of a new target of zero fiscal deficit on a cyclically adjusted basis,” the survey recommended.

However, India has witnessed only one economic cycle since Independence and there is no estimate of average duration of an economic cycle.

Under the FRBM Act, the Centre was supposed to eliminate revenue deficit and contain fiscal deficit at 3 per cent of the GDP by March 2009. This could not be achieved owing to a host of reasons, including falling revenues, implementation of the Sixth Pay Commission, as well as the three stimulus packages announced between December 2008 and February 2009.

As a result, the targeted fiscal deficit of 2.5 per cent in 2008-09 inflated to 6.1 per cent, the highest in seven years.

The survey recognises the need for continued fiscal policy stimuli. “Within the proposed fiscal expansion, the mix of expenditure and tax cuts would be critical in the context of its impact on overall macro-economic fundamentals like growth, interest rates and exchange rate,” it said.

The survey has also called for reverting to the mandate prescribed by the FRBM Act at the earliest and quick reversal of expansionary measures taken by the government to tackle the slowing economy.

The FRBM Act lays down fiscal deficit targets only till 2009-10. The survey says the long-term policy stance of the government beyond 2010-11 will be laid down by the Thirteenth Finance Commission report, scheduled to be tabled later this year.