Keep to fiscal path

Risky to stray from deficit target in Budget

A dominant issue of debate in the lead-up to the Budget is the sanctity of the Fiscal Responsibility and Budget Management (FRBM) Act and the fiscal deficit targets set under that framework. The current year's target was 4.1 per cent of gross domestic product (however measured) with the gap dropping to 3.6 per cent for 2015-16 and then to the floor of three per cent thereafter. When the government presented its first Budget last July, many observers expected it to use the extremely worrisome macroeconomic situation at the time to justify a deviation from the target. That it did not do so was, in the eyes of some, a welcome signal of self-discipline; but to others, it was an opportunity lost. Since then, of course, the macroeconomic environment has changed dramatically for the better. Oil and other commodity prices have helped bring both inflation and the current account deficit within control. They will also provide the government some breathing space on the huge subsidy bill. However, during this time, the virtual breakdown of the infrastructure development strategy stares the government starkly in the face. This has led to some influential voices, including in government, to argue that the investment imperative in infrastructure should override the objective of adhering to the path laid down under the FRBM Act.

This is a tempting argument, but a decision to deviate from a stated target carries significant risks. From the resource standpoint, even if caution is thrown to the wind, the quantum of resources that can realistically be allocated for capital expenditure is not going to be enough to solve the problem. The fact that the public-private-partnership (PPP) projects have failed to deliver should not lead to the presumption that the existing public sector machinery can deliver in its place. After all, the reason why PPP became popular was because of a general sense of frustration with the implementation of projects by the public sector. Beyond this concern is the larger risk to credibility. Both on fiscal and monetary fronts, credibility is hard-earned and very easily lost. A deviation from the targets, even if well-intentioned, will inevitably raise suspicions about the government's long-term commitment to fiscal discipline. Like it or not, global capital allocations are influenced by sovereign ratings, which are going to be significantly impacted both by the coming year's Budget numbers and the credibility of the government's commitment to fiscal prudence.

To increase the flow of funds into infrastructure, the government should instead discover and unlock new pools of funds, as well as put in place a delivery and monitoring mechanism that inspires confidence. Committing the proceeds from a far more aggressive disinvestment plan to infrastructure, for example, could contribute to a strategy to deal with the resource constraints. On the delivery side, though, the last thing the government should do is to rely on budgetary allocations to ministries, which would just be reactivating an already unreliable model. Clearly, a new institutional mechanism is required to ensure that projects are executed with high efficiency. This requires both holding vendors to account and ensuring that the various public authorities involved in any project align their activities. This, rather than a deviation from the fiscal deficit targets, should be the objective.