Are fiscal risks increasing?

Are fiscal risks increasing?

Context:

• Budget 2018-19 has proposed amending the FRBM Act again, which will shift the target of 3% fiscal deficit-GDP ratio to end-March 2021.

New framework:

• The new statutory anchors relate to the general and Central government debt-GDP ratios that are to be reduced to 60% and 40% of GDP, respectively, by 2024-25, based on the recommendations of the report by the FRBM Review Committee.
• No target has been set for revenue deficit.

Background:

• After the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 and the related FRBM Rules in 2004, the target fiscal deficit to GDP ratio of 3% for the Union government was achieved only once, in 2007-08, when it was 2.5%.
• The FRBM Act was amended twice, in 2012 and 2015.
• The revisions in 2015 shifted the date for achieving the 3% target to 2017-18. By this year, the amended revenue deficit target was put at 2% of GDP.

Fiscal and revenue deficits relative to GDP:

• The average rate or margin by which different governments have reduced the fiscal and revenue deficits relative to GDP has been quite low.
• The average margin of reduction over two periods, namely 2009-10 to 2013-14 and 2014-15 to 2018-19, for fiscal deficit relative to GDP was 0.3 percentage points per year in the first period and 0.2 percentage points per year for the second period.
• For the Centre’s debt-GDP ratio, the average reduction margin was 1.1 percentage points and 0.5 percentage points per year for the two periods, respectively.

Key recommendations were not accepted:

• The committee had not given up on the desirability of achieving revenue account balance. It had specified a revenue deficit glide path, reaching 0.8% by 2022-23. This too was not accepted.
• The Central government did not accept another recommendation of setting up a fiscal council, which could independently examine the economic case and justification for deviating from the specified targets.
• In the committee’s recommendations, the debt-GDP levels of 60% and 40% of GDP for the general and Central governments, respectively, were to be achieved by 2022-23. These target dates have been shifted to 2024-25.

Fiscal risks

•  Fiscal risks may also be higher with the reliance on extra-budgetary resources for financing a number of ambitious government spending programmes.
• In the Budget for 2018-19, the total outlays for three focus areas, namely, agriculture and rural livelihoods, infrastructure and education, and health and social sectors, amount to 11.6% of GDP.
• Budgetary resources constitute only 16.4% of the total outlay.
• The balance, 83.6%, is to be raised as an extra-budgetary resource by the public sector enterprises concerned, special purpose vehicles and other similar institutions.