Sarma said the authors, which included Y V Reddy
and Ashok Lahiri, looked at the experience of other countries, including that the Maastrict Treaty embraced, to finally come up with this number. This position was also endorsed by the N K Singh committee to review the FRBM, which gave its report in 2017. “Importantly, the Act did not borrow the three per cent limit from the European Union’s fiscal rules as is commonly believed. The fiscal deficit
target of three per cent was, in fact, adopted with two considerations in mind: a) consistency with the forecast trend of household financial savings and b) the target being considered sufficient for reducing the stock of outstanding government liabilities to the level of 50 per cent of the GDP within 10 years”.
According to Sarma, there was a difference of views among the original authors about whether to pen a number or leave it to the government of the day. Reddy, for instance, preferred the latter course. In subsequent speeches, Reddy argued that while there is a need for a “nominal limit for fiscal deficit, what is even more important is the mode of financing the fiscal deficit and the use that the resources so raised are put to”.
“Our rough calculations showed three per cent was reasonable, it was achievable. I agree that the number does not meet the test of an economist,” Sarma remarked. But it has done its job as a goal. “If you want any teeth for the report, you must mention a goal. Unless you mention it, the bill may not have had any impact.”
As subsequent governments have found out, the three per cent fiscal deficit goal has stood the test of time. When writing the FRBM review, Singh had also asked Sarma to explain how the critical numbers were arrived at. “I told him our background papers were with the department of economic affairs. I am not aware if those are still there, but I have none with me now. My position remains that without a figure the entire policy would have been subjective.”