FRBM panel may advise govt against fiscal deficit range

Idea was to provide a flexibility to the government to deal with variables like global volatility, the monsoon, and slow private investment

The Fiscal Responsibility and Budget Management (FRBM) committee, tasked with suggesting a future fiscal road map, could recommend continuing with fixed numbers as fiscal deficit targets, instead of a range.

When the panel was formed in May, with former member of Parliament and revenue and expenditure secretary N K Singh as its chairman, one of its terms of reference was: “To examine the need and feasibility of having a ‘fiscal deficit range’ as the target, in place of existing fixed numbers (percentage of gross domestic product); if so, the specific recommendations of the committee thereon.”

The idea was to provide a level of flexibility to the government to deal with variables such as global volatility, the monsoon, and a slowdown in private investment leading to higher public spending, and macroeconomic shocks.

Finance Minister Arun Jaitley, in his Budget speech in February, had also spoken of the need to study the feasibility of a range.

However, members of the panel, as well as government officials, are said to have studied the fiscal targets of various countries and found no earlier instance of a nation adopting a range. “We studied close to 100 countries. There is no precedent for this (a fiscal deficit range). If a range is suggested, we could be entering unknown territory,” said an official aware of the matter. The official said no final decision had been taken with the date of submission of the panel’s report (October 31) still some time away. “As far as providing flexible target is concerned, there are other ways that are being considered,” he said.

One way could be to move to a functional multi-year medium-term fiscal framework. This would consist of a macroeconomic framework that provides GDP and inflation forecasts, a revenue forecasting framework that predicts tax revenue on the basis of the relevant tax base and the impact of changes in tax rates, and an expenditure framework that specifies the ministry/sector-wise allocable ceiling each year —  total expenditure less committed expenditure on salaries, maintenance, pensions etc.

A part of such a plan is already in the works from next year, with a multi-year outcome-based expenditure framework with rolling targets being cleared by the finance ministry’s expenditure department. Sources say rolling expenditure targets for three-year periods will provide the requisite flexibility, as each passing year the ministry will review next year’s already laid-out targets and change them accordingly. Such a method could be applied to deficit targets.

As reported in Business Standard earlier, the FRBM panel may recommend combining the fiscal deficit and debt targets of the Centre and states

Among its other terms of reference, it will also take a re-look at various aspects, factors and considerations for determining FRBM targets and will examine the feasibility of aligning fiscal expansion or contraction with credit expansion and contraction.

The other members of the FRBM panel are Chief Economic Advisor Arvind Subramanian, former finance secretary Sumit Bose, and Rathin Roy, the director of National Institute of Public Finance and Policy, and a Business Standard columnist. The incoming Reserve Bank of India Governor Urjit Patel was also a member as deputy-governor. He resigned after being elevated to the top post.

NOT RANGE BOUND

• Panel’s terms of reference include studying feasibility of fiscal deficit range
   
• Range was to provide flexibility to policymakers to deal with volatility
   
• Fiscal targets of many countries studied, no precedent of range
   
• Panel may suggest sticking to fixed numbered targets
   
• Flexibility can be achieved through multiple-year rolling targets