Need to end fiscal targeting obsession

Need to end fiscal targeting obsession

It seems from the earlier budget speeches of the Finance Minister (FM) that he would continue to strive for lower figure of fiscal deficit, even in his budget proposals for the year 2018-19.

Since NDA government took over the rein of power in 2014, successive budgets have shown definite resolve of the government to reduce fiscal deficit figures in the budget. Present government accepted the challenge of reducing fiscal deficit, trend of which had started by the UPA government in the last two years of their rule. In 2011-12 the fiscal deficit had reached 5.7 percent of GDP, which was reduced to 4.8 percent in 2012-13 and 4.4 percent in 2013-14. In 2013-14 and by the year 2016-17, it had come down to merely 3.5 percent of GDP; and in the budget 2017-18, this was targeted at 3.2 percent of GDP.

However, due to slipping on GDP growth targets, structural adjustments like demonetisation and GST etc., it seems that finance ministry may not be able to reach at the revenue figures as projected in the budget 2017-18. Therefore, it seems that we may miss the target of fiscal deficit, as estimated in the budget 2017-18. However, it seems from the earlier budget speeches of the Finance Minister (FM) that he would continue to strive for lower figure of fiscal deficit, even in his budget proposals for the year 2018-19.

Should fiscal targeting be the sole aim of the budget making?

The last few budgets, especially of NDA government makes us to believe that perhaps fiscal targeting (about fiscal deficit as percent of GDP) has been the sole aim of the budget making; and all other variables are adjusted according to this constraint. Anybody familiar with budget making process knows that more than 90 percent of the budget is already fixed and there is hardly any chance of flexibility. We must understand that so far as expenditure on administrative services, police, defence, etc. Is concerned,  there is no possibility of any reduction, however every year there is a compulsion to raise these expenditures on account of salary and pension, inflation etc. Interest on public debt is yet another item which keeps on increasing due to ever rising public debt. Expenditure on social sectors like education, health, women and child development, drinking water, SC/ST welfare, minority welfare etc., which is required to be increased for welfare of masses, needs to be maximized, and cannot in any case be allowed to go down. Therefore lack of any flexibility in expenditure on different items in the budget makes it impossible to raise expenditure on desired services namely social and economic services, especially health, education and capital formation, without increasing the size of the budget. It is notable that because of self imposed constraint by the Finance Minister to keep the figure of fiscal deficit low, since budget 2014-15 till 2017-18 (3 years), size of the budget could increase from Rs. 16.63 lakh crore to Rs. 21.46 lakh crore only (29 percent increase). Worst victim of this inadequate increase have been capital expenditure, health, education and other social services.

It is notable that Fiscal responsibility and Budget Management (FRBM) Act was passed in 2003 and it was targeted that by 2008-09 fiscal deficit would be brought down to 3 percent of GDP. It is notable that, fiscal deficit reached 2.5 percent of GDP by the year 2007-08; however since then it kept on increasing and remained high.

It was only in 2012-13 that, FRBM Act was remembered again and since, NDA govt. had taken over, it has gone on the path of fiscal consolidation as per the mandate of the FRBM Act.

Arguments for targeting (Fiscal Deficit)

Arguments in favour of targeting fiscal deficit are not far to seek. It's easily understood that more fiscal deficit would mean more public debt, which leads to more interest liabilities for the govt, making the task of budget making even more difficult in future years. If a part of fiscal deficit in financed by monetising (borrowing from Reserve Bank of India (RBI) and RBI in turn printing more currency notes), there is danger of inflation. Country has seen the spiralling inflation after the spells of monetising of debt.

Dangers of Being Too Much Responsible

Though, drawbacks of high rate of fiscal deficit are well appreciated, we must not forget dangers associated with being extra responsible (fiscal policy). It is understood that if we try to keep fiscal deficit extra low, it would cause cut in government expenditure, worst victim of which would be capital expenditure and social sector expenditure.

In the last few years of NDA government's acting responsible in fiscal policy making, has caused slow growth of capital and social sector expenditure, which is key to economic and social development.

We know that since NDA govt. has taken over, private investment has not been picking up. Private corporate sector is sitting over huge amount of cash reserves (amounting more than Rs. 10 lakh crores), but not ready to invest. Their argument is that economic environment in the country is not conducive to investment. The fact of the matter is that they are enjoying high interest receipts on their cash reserves (thanks to adamant approach of RBI and now Monetary Policy committee, not to reduce the policy interest rates) and at the same time capital expenditure of the government has not been increasing at the desired rate. Under these circumstances it has become difficult to increase GDP growth despites best efforts of the government.

Need for fiscal flexibility

Given the risk of government revenue slipping the target of revenue as projected in the budget 2017-18 and also the possibility of falling short of resources even next year, there is an apprehension that finance minister may opt for lower capital expenditure and also lower expenditure on social sector like education and health. However, given the fact that the economy urgently needs a big push to increase the growth rates in GDP and also to improve the sentiments in the market, there is a dire need to increase the capital expenditure. Further there is a need to improve health and education services in short run as well as in the long run in order to achieve Sustainable Development Goals (SDGs). For this finance minister has to come out of the obsession of keeping the fiscal deficit figure at low level. Even N K Singh committee, which was constituted two years ago, had also opined that fiscal deficit targeting needs to be more flexible.

By Dr. Ashwani Mahajan, National Co-Convenor, Swadeshi Jagran Manch