(GIST OF YOJANA) Fiscal Sustainability Framework and Deficit Indicators  [APRIL-2020]

(GIST OF YOJANA) Fiscal Sustainability Framework and Deficit Indicators

 [APRIL-2020]

Fiscal Sustainability Framework and Deficit Indicators

Introduction:

  • To achieve fiscal consolidation and prudent fiscal management, the Government of India has enacted FRBMA (Fiscal Responsibility and Budget Management Act-2003.
  • The ‘hygiene and sustainable’ aspect of the budget can be measured through various deficit indicators and their ensuing impacts and incidences on the economy on the basis of macroeconomic outcomes.

Fiscal Deficit: Estimated vs. Actual

  • It indicates the total borrowing obligation to finance its deficit during a particular fiscal year and used to measure fiscal discipline and governs the long-term economic policy of a country.
  • In spite of a lot of pressing need, the budget has kept the targeted fiscal deficit at 3.5% of GDP.
  • In addition to above, budget has also made provision for higher capital expenditure, with a clear indication towards positive outcome through sustainable development.
  • However, the government has embraced ‘Escape Clause’ to deviate 0.5% in the set fiscal deficit to accommodate structural complexities and uncertain fiscal changes due to uncertain macroeconomic environment.
  • Owing to implementation of FRBMA as a mechanism and policy intervention, the estimated fiscal deficit has decreased till 2008-09, but later did not follow the path of fiscal discipline.

Linkage between Fiscal Deficit and Revenue Deficit:

  • Revenue deficit indicates that the government is unable to meet its current/revenue expenditure from its current/revenue receipts. So, the government adheres to borrowing (fiscal deficit) to finance the revenue short fall or in meeting the capital expenses.
  • Fiscal consolidation can be possible through revenue augmentation, without curtailing of the development expenditure.
  • Containing fiscal deficit at its set target by reducing expenditure at the cost of socio-economic well-being of the nation; can never be a welcome step. That’s why; the only and the ultimate way to reduce the fiscal deficit is to reduce revenue deficit.

Fiscal Glide and Initiatives:

  • The first phase of fiscal deficit reduction followed a steady path up to 2008-09, but later fiscal deficit has shot up to 6.8% of GDP in 2009-10 and remained above 4.6% for the next four years due to adoption of expansionary fiscal stimulus package to combat ill effect of global meltdown.
  • Further, Kelkar Committee (2012) has recommended that the fiscal deficit should be kept at 3% of GDP by 2016-17, by the end of 12th plan. However, it was delayed by next two years to house the fiscal and structural challenges like demonetization and global uncertainties.
  • Post-budget 2017-18, the Finance Minister set a committee under the leadership of N. K. Singh to appraise the FRBM act after a gap of 13 years.
  • The committee recommended shifting the focus of budget analysis in terms of ‘fiscal deficit’ to ‘debt-GDP ratio’ and set the target to keep the same at 60% by 2023 and keeping fiscal deficit at 3% for next three years.
  • Further, the government has suggested to have the value of fiscal deficit to be in a ‘range’ than a ‘fixed value’; in order to provide fiscal space to the government to accommodate any global shocks and economic uncertainties.

Fiscal Sustainability and Fiscal Focus:

  • Budget has set the fiscal deficit target of 3.5% of GDP, with a plan for augmented capital expenditure.
  • Besides, emphasis is given to rationalizing and scrutinising all kinds of revenue expenditure in tune with the long-term fiscal goals and adhering to quality expenditure. This is where the beauty of quality and sustainability intersects.
  • The current budget provides fiscal space to the policymakers in augmenting agriculture, health, education and infrastructure development. Increase in sharing of funds for capital expenditure symbolizes the fiscal outlook of the current budget.
  • Besides, net market borrowing of the government is restricted to Rs. 5.36 lakh crore which indicates the intent of the government to restrict the debt liabilities.

High Fiscal Deficit: Not Advisable

  • Another ‘School of Thought’ opines that continuous adherence to high fiscal deficit over the set deficit reflects fiscal distress of an economy.
  • Based on the historical perspective (2003-04 to 2020-21), fiscal deficit in India will continue to be a concern over the years to come; unless supported by corresponding increase in capital expenditure and rationalization of revenue expenditure.
  • The crowding out effects of private investment on account of high fiscal deficit should not suppress the benefits of higher capital expenditure. The debt liabilities (both principal and interest payment) always pose a threat to an economy and hence fiscal consolidation is the main aim to achieve long-term growth.

Way Forward

  • Fiscal deficit can be reduced to its desired level only by reducing the revenue deficit, not the capital expenditure. This can be possible through revenue augmentation and expenditure rationalization.
  • Efficient management of expenditure is the key to fiscal consolidation; centrally sponsored schemes are restructured for greater synergy and effective implementation by which unnecessary overlapping expenditure can be curbed.

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