Govt mulls primary deficit targets for new FRBM road map

FRBM panel recommended fiscal deficit target of 2.5% of GDP, revenue deficit of 0.8% for 2022-23

The finance ministry, which is discussing the recommendations of the Fiscal Responsibility and Budget Management (FRBM) committee, could possibly include the suggestions of Chief Economic Advisor Arvind Subramanian on primary deficit in the government’s deficit targets for six years till 2022-23.

The FRBM panel has recommended a fiscal deficit target of 2.5 per cent of gross domestic product, revenue deficit of 0.8 per cent and a combined Centre-state debt ceiling of 60 per cent for fiscal year 2022-23, the end point of its six-year medium-term fiscal road map. Other recommendations include setting up of a fiscal council and giving the government tightly defined escape clauses to deviate from the road map.

Panel member Arvind Subramanian has authored a lengthy dissent note to the committee’s recommendations, in which he suggests that the focus of policymakers should be on reducing primary deficit rather than fiscal deficit. The other members of the panel drafted a rejoinder to Subramanian’s dissent note.

The other members of the panel are former member of Parliament and revenue and expenditure secretary N K Singh, former finance secretary Sumit Bose, RBI governor Urjit Patel, and Rathin Roy, director of National Institute of Public Finance and Policy.

“I would propose a simpler architecture, comprising just one objective: Placing debt firmly on a declining trajectory. To achieve this, the operational rule would aim at a steady but gradual improvement in the general government primary balance (non-debt receipts minus non-interest expenditures), until the deficit is entirely eliminated,” Subramanian wrote in his dissent note.

His advice was not officially a part of the FRBM recommendations. Even then, the senior policymakers in the government are discussing whether to include his advice on primary deficit in the FRBM framework, which will gain legal backing through a new Bill expected in the winter session of Parliament. If passed, the proposed debt management and fiscal responsibility Bill will replace the existing FRBM Act.

“Subramanian’s recommendations seem more doable,” a top finance ministry official said.

“Though the discussions are at an initial stage, we are deliberating not only on the FRBM panel’s recommendations but also Subramanian’s proposal. The latter could provide the government greater flexibility to spend during economic downturns, along with the panel’s proposal of a fiscal council,” said another official, who is aware of the deliberations.

As reported earlier, the government is already said to be in favour of setting up a fiscal council, a semi-independent body to be tasked with monitoring the Centre’s fiscal announcements for any given year, providing its own forecasts and analysis for the same as well as advice the Centre on deviating from the fiscal path under certain circumstances.