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Centre, states may welcome N K Singh's plan for fiscal deficit range

Earlier this month, Fifteenth Finance Commission Chairman N K Singh aroused the interest of policy watchers when he said that the Commission is considering suggestions on having a fiscal deficit target range instead of a fixed number.

After the final meeting of 15th FC’s economic advisory council, Singh had said that there were discussions around the need to fundamentally revisit the Fiscal Responsibility and Budget Management Act, under which the centre gives a single number as the fiscal deficit target as percentage of nominal gross domestic product. The target for 2020-21 is 3.5 per cent of GDP.

“There is merit looking at a range rather than a number. It would be in congruity with monetary policy targets. Giving a range will be a more realistic proposal, and will lead to less accounting engineering,” he had said, adding that the proposal will be considered by the Commission.

He said that if a range is recommended by the commission, a mean target will also be recommended, just like the inflation target given to the Monetary Policy Committee. The MPC’s mandate is to keep inflation below 4 (+/- 2) per cent. “Giving a range will mean revisiting the FRBM Act. That law provides a fixed point. These are the issues we need to mull over,” he said.

If the 15th FC, in its report for 2021-22 to 2025-26, does recommend a fiscal deficit range, it will likely give some breathing space to the centre and state governments, as they face ever dwindling revenues. This has also led to strained relations between the centre and states in the GST Council.

Latest available data shows that the stress on revenue resources due to Covid-19 continues showing on the Centre’s books. For April-July, the Centre’s fiscal deficit stood at Rs 8.21 trillion, or 103 per cent of 2020-21 budget estimates of 7.96 trillion, compared to 77.8 per cent for the same period last year, official data showed on Monday. In 2019-20, fiscal deficit had crossed 100 per cent of the full year BE by October-end.

With gross domestic product (GDP) data for the April-June quarter also released, it can now be calculated that fiscal deficit for the first quarter of 2020-21 came in at 17.4 per cent of nominal GDP. Finance Minister Nirmala Sitharaman had pegged the fiscal deficit for the year at 3.5 per cent of GDP in the 2020-21 Union Budget.

Finance Ministry officials admit that the budget estimates no longer hold due to the pandemic and the nationwide lockdown, but the government is reluctant to issue fresh estimates for the year given the uncertainty around the trajectory of the pandemic or when it will end.

A fiscal deficit range would have helped policymakers when NK Singh had headed the FRBM committee. That would have shaped market expectations. Right now in the current context of the pandemic, a range has lost relevance somewhat. But Even if it is coming at a much latter phase, I would still welcome it,” said Soumya Kanti Ghosh, Chief Economic Advisor of State Bank of India.

Ghosh said the erstwhile FRBM Committee had missed an opportunity by not recommending a fiscal deficit range, because there were structural changes coming at that time, including implementation of GST and recapitalisation of state-owned banks.

The FRBM committee, in 2017, had recommended a fiscal deficit target of 2.5 per cent of gross domestic product, and revenue deficit of 0.8 per cent for fiscal year 2022-23, the end point of its six-year medium term fiscal roadmap. Other recommendations included setting up of a fiscal council and giving the government tightly defined escape clauses to enable any deviation from the roadmap.

Some of the recommendations of the Committee, like a fiscal escape clause, were accepted by the government.

Ghosh said that the centre would welcome any recommendation on the fiscal deficit range, even though the pandemic has ensured that achieving such targets will be a long drawn process. “Hypothetically, even if the centre gives a medium term fiscal deficit range of 3.5-4 per cent, it will take four-five years to reach that target,” he said.

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