NEW DELHI: The government’s attempts at fiscal consolidation by slashing expenditure over the past two financial years have prompted a suggestion for a course correction, with Planning Commission deputy chairmanMontek Singh Ahluwalia proposing that fiscal deficit targets be redefined so that they are not calibrated to a particular growth assumption.
In a note written to Prime Minister Manmohan Singh in February, at the fag end of the current commission’s term, Ahluwalia also suggested that the government move on to new fiscal parameters by using ‘primary deficit’ instead of fiscal deficit, as the latter includes interest payments, and abandon the ‘revenue deficit’, which is seriously misleading.
“We should redefine fiscal deficit targets in terms of ‘structurally-adjusted deficit’. If this is done, any unexpected deviation in GDP growth from the initial target would lead to an allowable adjustment in the structurallyadjusted fiscal deficit,” Ahluwalia said in the note, a copy of which has been seen by ET. According to Ahluwalia, if GDP growth is lower, the “structurally-adjusted” target would be allowed to rise because there should be no insistence on meeting a fiscal deficit target calibrated around a particular growth assumption even if that growth is not realised for other reasons.
“To try and meet the original target if GDP growth is lower, and revenues are therefore lower, forces undue contraction in expenditure. This makes fiscal policy pro-cyclical rather than being counter-cyclical,” the note said.
India’s credibility on the fiscal front took a big hit after 2011-12 when fiscal deficit slipped to 5.9% of GDP against the budgeted estimate of 4.7%, inviting fears of a sovereign downgrade by international rating agencies.
Finance minister P Chidambaram’s stringent fiscal consolidation plan, unveiled soon after he moved to North Block in August 2012, helped the country avert the rating downgrade risk. Chidambaram’s fiveyear fiscal consolidation road map seeks to contain fiscal deficit to 3% of GDP by 2016-17 by a 0.6% reduction every year. Fiscal deficit in 2012-13 came in at 4.9% of GDP, lower than the budgeted 5.2% and in 2013-13 at 4.6% of GDP against the budgeted 4.8%.
Chidambaram had slashed Plan expenditure sharply by 14.4% to Rs 4.7 lakh crore in 2013-14 from the budget estimate while non-Plan expenditure was cut down by 16.1% to Rs 3.7 lakh crore to meet the twin deficit targets. In 2012-13, the Plan expenditure was reduced by over Rs 90,000 crore to Rs 4.29 lakh crore, fromRs 5.21 lakh crore estimated in the budget. This helped contain fiscal deficit at 4.9% of GDP.
According to Ahluwalia, the measure of fiscal performance used internationally is not the fiscal deficit but the “primary deficit”, which excludes interest payments. “This is because interest rates can vary for reasons unconnected with current fiscal discipline,” he added in the note.
Implementing the proposed changes will, however, require an amendment to the Fiscal Responsibility and Budget Management Act, something that can be done now only by the next government after the general elections.