Time for forbearance, not rigid adherence: N K Singh on FRBM

Explained| The ugly truth about India’s adherence to the FRBM Act

“I don’t think that this year, and perhaps even next year, what is necessary for livelihood and what is necessary for addressing the issue of pandemic deserves the kind of constraints which the FRBM places. Perhaps it will be a no-brainer that the rigidities embedded in the FRBM law — this is not a time for that, this is a time for forbearance,” he told The Sunday Express.

Singh earlier headed a committee on the FRBM roadmap, which provided annual targets for reducing fiscal deficit and overall debt levels of the Central government. The government had accepted most of the committee’s recommendations.

In this year’s Union Budget, the finance ministry had estimated a fiscal deficit of 3.8 per cent of GDP in RE (Revised Estimates) 2019-20 and 3.5 per cent for BE (Budget Estimates) 2020-21, after taking into account a 0.5 per cent deviation as provided under the FRBM Act. Most economists expect the government to overshoot its deficit targets due to likely contraction in GDP, as the pandemic results in elevated spending even as revenue collections falter.

Singh said most aspects of the fiscal responsibility framework need to be revisited in the wake of the pandemic, and the Finance Commission is debating many of these issues.

“…in the deliberations of the FRBM committee itself, there was a robust debate on whether fiscal deficit and debt target should be a fixed point, or whether it should be range for both. That time, the majority view of the committee (which I headed) was that in a parliamentary democracy, if we give a range, there would be a tendency to operate at the upper end and therefore a fixed point was better,” he said.

“Similarly on debt, there was a viewpoint that instead of having debt as a main macroeconomic anchor, we should go for primary deficit – which really is fiscal deficit net of interest. I felt that would be shutting out the market completely. Therefore, we recommended having debt as the primary macroeconomic anchor and fiscal deficit as the enabling target. Both these premises need to be revisited because the need to recognise that fiscal range has a lot of merit in it and that the direction of debt is as important as the absolute debt targets themselves. There is a robust debate in the Commission on whether we should look at a range instead of a fixed point on some of these constraints. Certainly, this is not the time to worry too much about fiscal rectitude,” he said.

The Commission is also considering how flexibility can be provided without jeopardising the progress on fiscal consolidation achieved over the years.

“The danger is flexibility is much easier than coming back to the path of fiscal rectitude, exits from rules are easier than re-entry into compliance. Therefore, while recommending flexibility, you really end up seriously impairing the hard-won battle on macroeconomic stability, for which I must give credit to Prime Minister Narendra Modi, because he has withstood the successive years of pressure to relax the fiscal deficit. Because he recognises its implications for long-term macroeconomic stability and also recognises that expenditure outcomes remain more elusive in the sense of qualitative assessment of expenditures per se. Therefore, I think without really impairing that, if there is a need to bring in some flexibility, this is something which the Commission is seriously considering,” Singh said.