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Fiscal Framework: Learn from past to move ahead

Budget needs to push for better spending quality, use borrowing only for capital spending

BS Reporter  |  New Delhi 

Economic Survey 2014-15 has said the government should learn from the fiscal situation of the early 2000s to find a way forward in its consolidation plan. It has said the medium-term target of a fiscal deficit at no more than three per cent of gross domestic product (GDP) must be met.

Stating: “(George) Santayana (noted philosopher) once warned that those who ignore history are condemned to repeat it. India is today in a very similar situation to that in the early 2000s, with a comparable fiscal deficit at a broadly similar state of the macro economic cycle.”.

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“Today, like then, inflation is close to 5 per cent. Today, like then, the current account deficit is manageably low. And, today, like then, the economy is poised to attain a faster growth trajectory. So, it is worth asking: What are the lessons from recent fiscal performance in India?” it asked.

The survey, penned by Chief Economic Advisor Arvind Subramanian and his team in the finance ministry, said meeting the three per cent fiscal deficit target will provide the fiscal space to insure against future shocks and to move closer to the fiscal performance of India’s emerging market peers.

The fiscal road map set by Parliament aims at a fiscal deficit of three per cent of GDP by 2016-17.

“India must also reverse the trajectory of recent years and move towards the golden rule of eliminating the revenue deficit and ensuring that, over the cycle, borrowing is only for capital formation. The way to achieve these targets will be expenditure control, and expenditure switching from consumption to investment,” the Survey said, reiterating Subramanian’s stand on increased public investment made in the mid-year economic review last December.

“Increases in the tax-GDP ratio stemming from the taxation of petroleum products will also help achieve short and medium-term fiscal goals,” it said.

Subramanian stated in the Survey that the trends in expenditure favouring public consumption rather than investment had affected the medium-term growth potential.

“For India, the key to achieving medium-term fiscal targets resides in expenditure control. The failure to do so during the boom growth years between 2005-06 and 2008-09 played a major role in the loss of macro economic control and the near-crisis of July/August 2013,” it declared.

The Survey said most of the macro economic headwinds over the past decade and a half had abated. The latest GDP growth estimates (for 2014-15) had exceeded those in most countries, including China. If that fiscal discipline is maintained, India’s debt dynamics will remain exceptionally favourable.

The Survey said concrete action will have to be taken in the Union Budget, to be presented on Saturday, to control expenditure via subsidy reductions, improve spending quality in altering the mix between public consumption and public investment, and move government borrowings for the end-use of public investment only.

“Broadly, the increase in fiscal space, including that gained from subsidy reductions and higher disinvestment proceeds, should be devoted to public investment.”

The report, however, warned that in the Budget, a strong fiscal consolidation policy would be difficult due to the additional expenditure burden from implementing the recommendations of the 14th Finance Commission and Central Sales Tax compensation to States.

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First Published: Sat, February 28 2015. 00:50 IST