FRBM panel for combining Centre, states' deficit targets

A panel tasked with reviewing the Fiscal Responsibility and Budget Management (FRBM) Act may recommend combining the fiscal deficit and debt targets of the Centre and states. The panel is also set to back the government’s proposal to introduce rolling expenditure targets for three-year periods.

The FRBM panel, led by former member of Parliament and revenue and expenditure secretary N K Singh, is examining the feasibility of a “fiscal deficit range” to replace the existing fixed numbers as percentages of the gross domestic product (GDP). It will also re-look factors for determining FRBM targets and the aligning of fiscal expansion or contraction with credit expansion and contraction.

Discussions are being held. However, a consensus is said to have emerged that the fiscal deficit target should be the combined average target of the Centre and states. This would also apply for borrowing targets.

 

UNDER REVIEW

• FRBM panel looking into feasibility of fiscal deficit range and other changes
   
• Panel feels combining Centre-state indicators will provide a clearer picture of economy
   
• Panel could also support govt’s bid to overhaul budgetary process
   
• Govt planning 3-year flexible rolling targets for expenditure

“When we talk about fiscal indicators, the Budget process and subsequent actions only keep the Centre’s deficit and borrowing requirements in mind. States’ borrowing, debt burden, or deficit have not been taken into account. Including states’ finance indicators will give a clearer picture of the economy,” said a source.

The other members of the panel are Reserve Bank of India Deputy Governor Urjit Patel, Chief Economic Advisor Arvind Subramanian, former finance secretary Sumit Bose, and Rathin Roy, the director of the National Institute of Public Finance and Policy.

The panel, mooted by Finance Minister Arun Jaitley in his 2016-17 Union Budget speech, will review the working of the FRBM Act over the past 12 years and suggest the path forward, keeping in mind the broad objective of fiscal consolidation and the changes required in the backdrop of global volatility.

If combined, there is expected to be a huge reset in fiscal deficit targets. For example, and according to historical data available on the finance ministry’s website, the Centre’s fiscal deficit for 2013-14 was 4.6 per cent of GDP. The combined Centre-state fiscal deficit that year was 7.10 per cent. In the year before that the Centre’s fiscal deficit was 4.8 per cent, but the combined deficit was 6.76 per cent.

Over the years, better budgetary management has ensured that the Centre’s fiscal deficit has reduced, with the budgeted estimate for 2016-17 at 3.5 per cent. However, there are genuine concerns that with the states taking over discom debts under the Ujwal DISCOM Assurance Yojana (UDAY), their fiscal deficit will exceed the 3 per cent mandated by the FRBM. This could lead to huge jump in the combined fiscal deficit, with some estimates claiming it could be more than 8 per cent.

The debt burden of states is one of the reasons the panel may recommend combining borrowing targets. According to data available with Reserve Bank of India, in 2014-15, the net market borrowing of the Centre was Rs 4.7 lakh crore, while the combined gross market borrowing was Rs 6.7 lakh crore. For 2016-17, the borrowing target for the Centre is Rs 4.2 lakh crore.

The finance ministry is said to be supportive of the panel’s views. The ministry would want to make such changes part of its planned overhaul of budgetary process from 2017-18 onwards. It plans to make changes to almost all processes and formats including pre-Budget meetings, statement of Budget estimates, Budget at a glance, expenditure statements volumes I and II, demand for grants, as well as the medium-term expenditure framework.

These changes would primarily be necessitated because of the abolition of the plan and non-plan classification of expenditure. This is henceforth likely to be classified as revenue and capital expenditure.