3% fiscal deficit target has no magic validity, says CEA Arvind Subramanian

CEA said fiscal policy should not be irresponsibly expansive

Chief Economic Advisor (CEA) Arvind Subramanian on Tuesday criticised the concept of fixed fiscal deficit targets and said the economic discourse around a three per cent target had no validity.

“All the commentary over the past 15-20 years has made this three per cent fiscal deficit target a magic number, and it has no magic validity at all. It came out of some circumstances in history, not even in our country but in Europe. We can go into a long debate on what can be our fiscal policy going forward,” Subramanian said.

He said fiscal policy should not be irresponsibly expansive. “It is a very flexible and important standard,” Subramanian said, adding that strictly fixed numbers as targets served no purpose. 

“Debt is high but whether it should be 50 per cent or 60 per cent, no one really knows. That is why in my FRBM (fiscal responsibility and budget management) note, one objective should be gently declining debt and a gently declining deficit path to accomplish that,” the CEA said, while speaking at the Nehru Memorial Library and Museum.

Subramanian’s comments come against the backdrop of his dissent note to the recommendations of the FRBM committee, of which he is a member. The panel has recommended a fiscal deficit target of 2.5 per cent of gross domestic product, revenue deficit of 0.8 per cent and a combined centre-state debt ceiling of 60 per cent for 2022-23, the end point of its six-year medium term fiscal road map. Other recommendations include setting up of a fiscal council and giving the government tightly defined escape clauses to deviate from the road map.