Fiscal target gliding away from its path

In the Union Budget for 2022–23, Finance Minister Nirmala Sitharaman kept the Budget Estimate (BE) for the fiscal deficit (FD) at 6.4% of GDP. She described this as ‘advancing on the road to fiscal consolidation,’ citing the target of 4.5 % to be achieved by 2025–26 (this was announced in her budget speech for 2021-22). As per the revised estimate (RE) given while presenting the budget for 2023–24, she has precisely achieved this number. For 2023–24, she has kept the target at 5.9%, and for 2025–26, one would get the sense that the Union government is proceeding at the desired pace on its fiscal consolidation trajectory. This inference could be misleading. Let us do some fact-checking.

In his budget speech for 2016–17, the then Finance Minister Arun Jaitley announced the intent of the Modi government to review the Fiscal Responsibility and Budget Management (FRBM) Act (2003) with a view to making the FD target more flexible. He had set up a committee under Dr N K Singh to examine the issue.

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The committee recommended a “glide path” for the next six years, i.e., from 2017–18 to 2022–23. It recommended an FD target of 2.5%, a revenue deficit of 0.8%, a combined Centre-state debt ceiling of 60%, and a central debt ceiling of 40% for the terminal year, i.e., 2022–23. Further, it fixed a 3% FD to be achieved during 2018–19. It also allowed the Union Government to breach the target—by up to 0.5%—in the case of “far-reaching structural reforms with unanticipated fiscal implications.”

In the amendment to the FRBM Act in the Finance Bill 2018–19, even while retaining the “escape clause” to cover unanticipated events, the government adopted the glide path of achieving a 3% FD by 2020–21 instead of 2018–19, which was mooted by the committee. Further, it set the debt limit at 40% for the Centre to be reached by 2024–25 instead of the committee’s mandate of 2022–23.

The relaxation in the glide path may be seen in the backdrop of the government missing the FD target for 2017–18 by 0.3% and seeing no hope of achieving 3% during 2018–19, as recommended by the committee.

In the Budget for 2020-21, Sitharaman had already invoked the escape clause of the FRBM (Amendment) Act to alter the FD targets for 2019-20 from 3.3 % as provided in the Budget to 3.8 % in the RE and for 2020-21, from 3% - as per the glide path required under the Act - to 3.5%.

On February 1, 2020, when the budget for 2020–21 was presented, the coronavirus pandemic had not yet landed on Indian shores; hence, its implications couldn’t have been known at that stage. The other big thing was a steep reduction in the corporate tax rate in September 2019. That reform was far-reaching but can’t be treated by any stretch of the imagination as an unanticipated event.

In the midst of the Corona crisis, the government wanted some more leeway by adopting a flexible, range-bound FD target instead of a fixed number. The issue was discussed at the Economic Advisory Council (EAC) of the 15th Finance Commission (FC), wherein the chairman, NK Singh, cited a similar practice followed by the Reserve Bank of India (RBI) with a +/- 2% inflation target while deciding its monetary policy.

That proposal wasn’t pursued, for good reason: it would have sanctioned slippages, defeating the purpose of fixing a target, which is to obligate the government to keep expenses in check. Seen in relation to the target set by the N K Singh Committee or even to the FRBM (Amendment) Act, the performance of the government has been off the mark. For instance, during 2018–19, the FD was 3.7% against the 3% required as per the Singh Committee. If deferred subsidy payments (DSPs) are also included (in those years, substantial amounts of major subsidy bills, viz., food, fertilizers, and fuel, were kept pending), the FD would be 5.7%. Likewise, for 2019-20, including DSPs, the FD would be 5.1%. It was an aberration when in 2020–21 the FD turned out to be 9.3% (against BE’s 3.5%); hence, comparison with the glide path may not be apt.

One might not be inclined to do it for 2021–22, probably because of the spillover effect, although that won’t be fair as the economy has rebounded and tax collections have surged. But, surely, we can do it for 2022-23.

The FD of 6.4% for 2022–23 is more than twice the 3% mark required to be achieved by 2020–21, even as per the FRBM (Amendment) Act, and the revenue deficit is at 4.1% against 0.8% as per the NK Singh Committee. The debt to GDP ratio of the Centre is around 60% against 40% mandated as per the amended Act.

To reset the targets at a significantly relaxed level and then claim that fiscal numbers are well on track looks amusing.

(The writer is a policy analyst)