A Fiscal Deficit Target in a Range–economic times

Clipped from: https://economictimes.indiatimes.com/blogs/et-editorials/a-fiscal-deficit-target-in-a-range/ET Edit

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.

N K Singh, chairman of the Fifteenth Finance Commission, is right to suggest a fiscal deficit range rather than a fixed number to make fiscal rules more realistic. Simultaneously, India must also set up an independent fiscal council, to assess the macroeconomic conditions and articulate the reason why the fiscal deficit target should be where it should be within the range. By spelling this out, the fiscal council would serve as a tool of communication to watchers of macroeconomic stability, including investors and bond markets. An institutional mechanism will also help remove arbitrariness and bring in transparency.

India needs active, real-time macroeconomic management, given the huge capital flows in a globalised world and market volatility due to monetary policy changes in major economies as well as geopolitical tensions that cause fluctuations in currencies and commodity prices.

The Monetary Policy Committee alone cannot be left to spell out how dependent their decisions are on what the government does. The working of the council would help synchronise fiscal and monetary policy. Fiscal rules, which originally targeted a fiscal deficit of 3% of the GDP, were adopted from July 2004. Gross fiscal deficit touched 6% of the GDP in 2008-09, following three stimulus packages in the wake of the global financial crisis. Now, the uncertainty heralded by the pandemic has led to a contraction in growth, underscoring the need to step up public investment by significantly widening the fiscal deficit.

A fiscal council to advise on invoking the so-called ‘escape clause’ makes eminent sense. Its creation was recommended by the FRBM review committee as well as the Thirteenth and Fourteenth Finance Commissions.

Rightly, the council should provide independent forecasts on macro-variables such as real and nominal GDP growth, and tax buoyancy, oversee compliance with debt targets and also specify a path of return. Roping in professionals with significant experience in public finance, economics or public affairs makes eminent sense.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

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