Economic Survey Takes a Conservative Stance on Govt’s Finances

The Indian parliament building in New Delhi. (Photo: Reuters)

Changing tack from last year, the Economic Survey released on Tuesday took a conservative stance on the government’s finances, saying that India’s economic experience shows the validity of the existing fiscal responsibility framework.

Still, it argued for some change in the operational framework of the Fiscal Responsibility and Budget Management (FRBM) Act, leaving room for the government to set a fiscal deficit target higher than 3 percent for fiscal 2018. Bond markets are expecting the government to announce a target of between 3.2-3.3 percent of GDP when the Union Budget is presented on Wednesday.

“...India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the Fiscal Responsibility and Budget Management Act (FRBM) Act 2003,” said a government release on the Economic Survey.

Globally, the thinking on fiscal responsibility has undergone a change since the global financial crisis of 2008-09. The new thinking puts greater emphasis on the deficit rather than the total stock of debt. But India’s experience has reaffirmed the need for rules to contain fiscal deficits, said the government in its release.

The FRBM Act 2003 asked that the government’s revenue deficit be eliminated by March 2008 and the fiscal deficit be brought down to 3 percent of GDP. The framework saw early success and the central government managed to bring down its deficit to a 30-year low of 2.5 percent of GDP in 2007-08.

Then came the global financial crisis. What followed was a period of expansion of the government’s fiscal deficit which surged to above 6 percent in fiscal 2009 and fiscal 2010. Since then the government has steadily, but slowly, brought down its deficit to 3.5 percent of GDP in fiscal 2017.

India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the heavy lifting on debt reduction.

Government Release On The Economic Survey

India’s debt-to-GDP ratio is around 66 percent and is among the highest in its peer group of emerging economies. This, along with the high general deficit, has been cited as a key reason by rating agencies for not upgrading India’s sovereign rating.

The release went on to add that while the basic tenets of the FRBM Act remain valid, the operational framework designed in 2003 may need some modification.

Under the existing Act, the government is required to bring its fiscal deficit down to 3 percent by fiscal 2018. However, a committee has relooked at this roadmap and submitted it to the government. Some of its recommendations are likely to be included in the Union Budget on Wednesday.

Focus on State Finances

The Economic Survey also highlighted the need for fiscal prudence both by the Centre and the states.

As per the Survey, there has been an improvement in the financial position of the states over the last few years. The average revenue deficit has been eliminated, while the average fiscal deficit has been curbed to less than 3 percent of Gross State Domestic Product (GSDP). The average debt-to-GSDP ratio has also fallen.

The Survey, however, went on to add that the fiscal challenges for states could rise because of the recommendations of the pay commission and mounting payments from the UDAY (Ujwal DISCOM Assurance Yojana) bonds.

As such, the survey said that there is a need to review how fiscal performance of states can be kept on track.

Greater reliance will need to be placed on incentivising good fiscal performance, not least because states are gradually repaying their obligations to the Centre, removing its ability to impose a hard budget constraint on them, says the Economic Survey. Above all, however, incentivising good performance by the states will require the Centre to be an exemplar of sound fiscal management itself.

Government Release On The Economic Survey

(Read the original story on BloombergQuint)