Fiscal consolidation: FRBM Panel offers little spending space to govt

CEA in dissent note observes main focus of Centre should be primary deficit, not fiscal deficit

Ahead of what is expected to be a populist Union Budget, the Fiscal Responsibility and Budget Management (FRBM) committee, which submitted its report to Union Finance Minister Arun Jaitley on Monday, is said to have provided only small wiggle room to the government to boost spending.

The panel is believed to have recommended a fiscal deficit target of closer to three per cent of gross domestic product (GDP) than to the 3.5 per cent as speculated earlier. 

“The panel has not really given the Centre that much fiscal room. For the coming year, it has not recommended a target of three per cent, but it is close to that,” said an official aware of the deliberations of the FRBM panel and the contents of its report. The finance ministry said in a statement after the submission of the report: “The government will examine the FRBM Committee Report and take appropriate action.” 

The current FRBM road map sets the fiscal deficit target for 2017-18 at three per cent of GDP. The existing 13-year-old FRBM Act is likely to be replaced with a new law, which will be based on the panel’s recommendations. The panel has provided a model FRBM law along with the report. Former Member of Parliament N K Singh, who was also Union revenue and expenditure secretary, heads the panel. It was supposed to submit its report on October 30 but could not do so because it was told by the government to consider the recommendations of the 14th Finance Commission, seek the opinion of the Reserve Bank of India (RBI) and study the impact of demonetisation.

The other members of the panel are former Finance Secretary Sumit Bose, RBI Governor Urjit Patel, Chief Economic Advisor Arvind Subramanian, and Rathin Roy, who is director of the National Institute of Public Finance and Policy.

Business Standard has learnt that Subramanian has objected to some recommendations. He has supposedly noted that the main focus of the government should be the primary deficit and not the fiscal deficit. However, the other members are said to have attached a rejoinder, in which they have reportedly listed the reasons why they disagreed with Subramanian’s note. 

Some panel members are said to have conveyed to the government their opinion that the report should be made public after the Budget and not treated like the reports that were not, for example, the one of the Expenditure Management Commission.

According to sources, the panel has likely provided a road map of six-eight years. In the intervening period, the Centre may have the elbow-room to increase spending.

The panel has likely suggested pauses in reducing fiscal deficit targets. The current FRBM road map mandates a reduction in the gap between expenditure and total revenue year after year. 

“A pause would mean that if the finance minister achieves the fiscal deficit target for any given year, he can stay at that number as a percentage of GDP for a couple more years before reducing it further,” the official said.

The Budget is expected to be a populist one because the government is looking at cushioning an expected slowdown due to demonetisation. Sops and a higher outlay for micro, small and medium enterprises, agriculture, and affordable housing are on the cards. 

Similarly, it is expected to give a thrust to the social sector, infrastructure and job creation.

As reported earlier, the FRBM panel is expected to recommend certain ‘excuse clauses’ under which extra spending is necessary Such conditions could include macroeconomic headwinds or slowdown, natural disasters like droughts or war. 

Speaking to reporters outside the finance ministry after meeting Jaitley and senior bureaucrats, Singh said the report had four volumes. 

The first volume addresses the fiscal policy, fiscal road map, international experience and recommendations therein.

The second contained international experience, for which the panel got presentations from organisations including OECD and the World Bank. 

The third deals with Centre-state relations. States as well as central ministries have given their views, but "to some extent, direct relationship between state-related fiscal issues were somewhat tenuous...A responsible growth, debt and fiscal framework, debt issues are frontal in that," he said.

The fourth volume is "what we call the domain experts", both national and international. "It deals with their own views — what they believe the appropriate fiscal policy would be. So, we have addressed the entire terms of reference with the committee," Singh said, adding, "we have had FRBM reports but the issue of debt had remained somewhat unaddressed".

The panel had been formed in May last year and, among other things, was tasked with reviewing the FRBM Act in view of suggestions that there should be a range for the government's fiscal deficit in place of the current practice of having a fixed target. 

As reported earlier, it has likely suggested against having ranges for targets.

Focal points

• Panel submitted a four-volume report to Finance Minister (FM) Arun Jaitley on Monday

• Panel has likely suggested a fiscal deficit target of slightly higher than 3%, pauses in yearly fiscal deficit targets and ‘excuse clauses’

• FM will need a lot of leeway to spend in FY18, in the wake of demonetisation

• Chief Economic Advisor (CEA) Arvind Subramanian is said to have written a dissent note

• Other members said to have written a rejoinder, countering CEA’s dissent note

• Panel members want the report to be made public after the Budget; final decision with the Centre