The government recently announced the composition of a committee set up to enquire into the working of the Fiscal Responsibility and Budget Management (FRBM) Act, which is now 12 years old. The committee is to be headed by former revenue secretary, N K Singh; the other members will be the former finance secretary, Sumit Bose, Chief Economic Advisor Arvind Subramanian, Reserve Bank of India Deputy Governor Urjit Patel and the director of the National Institute of Public Finance and Policy, Rathin Roy. The committee, which held its first meeting last week, is to work swiftly by the standards of Indian government bodies, submitting its final report by October 31, 2016. The finance ministry's direction is that the committee should review the Act given the broad needs of fiscal consolidation and the "volatility and uncertainty" in the global economy.
Many have worried that this could mean that the current fiscal consolidation path will be abandoned in favour of a range for a fiscal deficit that a poll-bound government might find easier to deal with. Suggestions to this effect have already been made by some responsible people in the government. If so, that would be unfortunate. In fact, this should be seen as an opportunity to make the FRBM Act - which was, sadly, never really given a chance to succeed - more stringent. The best practices worldwide for independent Budget appraisal and monitoring mechanisms should be examined. The ideal case would be that a reformed FRBM Act sets up an independent Budget scrutiny office that helps, through transparent and predetermined factors, ensure that the Centre is constrained to keep within prudent deficit limits during good times, and is allowed a reasonable amount of leeway during bad times - but not too much, as happened in 2008-09, the year that the enforcement of the existing FRBM Act was paused.
What are the principles that should guide the committee in its examination of the working of the Act, and in its proposals for reform? Perhaps the most important ones are simplicity and targeting. In terms of targeting, it may be tempting to dilute the emphasis of the law towards considering the combined deficit of states and the Centre. But the truth is that states have been relatively better disciplined by a combination of structural changes in the 2000s. The focus of the FRBM Act should be the Centre, where the fisc has so far been largely unrestrained. Simplicity is no less an important principle. In its essence, the structurally high fiscal deficit of the Union government is a crude problem. It should therefore be self-evident that solutions to it should not be overly complicated. Politicians and bureaucrats should be provided as little wiggle room as possible to evade the strictures of a well-designed FRBM Act.
To be sure, the government's commitment to return to the path of fiscal responsibility in the last few years is praiseworthy. The proposed move to a medium-term fiscal framework, a more modern and flexible way of ensuring stability to government finances, is also welcome. However, the changes must be well-designed - for them to be credible in the eyes of bond markets and the wider world, they should not be seen as meeting the immediate interests of the current government. This purpose would be best served by any reform of the FRBM Act being accompanied with a commitment to stick to the currently announced fiscal consolidation path.
