Fiscal Responsibility: The Debate
FISCAL POLICY AND MEASURES TO REDUCE FISCAL DEFICIT TO MANAGEABLE LIMITS
Fiscal Responsibility - the Debate
1. There is, by definition, a tension between fiscal restraint and finding resources for all the expenditure needs of the government. Where this line is drawn and how this tension is managed is the stuff of much economic analysis as well as ideological debate. The Fiscal Responsibility and Budget Management (FRBM) Act mandates the Centre to have reduced fiscal deficit to 3% of GDP and to completely eliminate revenue deficit by 2008/09. Similarly, acting in response to the debt relief package recommended by the Twelfth Finance Commission (TFC) in return for fiscal correction, 24 of the 29 states had also enacted fiscal responsibility acts accepting similar obligations - fiscal deficit of 3% of Gross State Domestic Product (GSDP) and zero revenue deficit by 2008/09. The case for fiscal responsibility, both at the Centre and in the States, was made on the argument that fiscal consolidation is an essential condition for accelerating growth.
2. Some economists and critics have called into question the advisability of fiscal restraint when the public sector investment needs are so large and pressing, and have contended that in the Indian context, it is not fiscal contraction, but fiscal expansion that is growth enhancing. The Approach Papers to the Five Year Plans since have also made out a case for relaxing the FRBM targets in order to find sufficient resources for the ‘gross budgetary support’ (GBS) that the Plans demand.
3. This Paper will argue that staying the course and delivering on the FRBM targets is critical to sustaining the current growth momentum. The bedrock of sustainable growth is macroeconomic stability. Maintaining macroeconomic stability, as characterized by low inflation, stable interest rates and comfortable balance of payments, is critically dependent on redressing fiscal imbalances.
4. Three important qualifications on the
Fiscal Responsibility - the Debate
1. There is, by definition, a tension between fiscal restraint and finding resources for all the expenditure needs of the government. Where this line is drawn and how this tension is managed is the stuff of much economic analysis as well as ideological debate. The Fiscal Responsibility and Budget Management (FRBM) Act mandates the Centre to have reduced fiscal deficit to 3% of GDP and to completely eliminate revenue deficit by 2008/09. Similarly, acting in response to the debt relief package recommended by the Twelfth Finance Commission (TFC) in return for fiscal correction, 24 of the 29 states had also enacted fiscal responsibility acts accepting similar obligations - fiscal deficit of 3% of Gross State Domestic Product (GSDP) and zero revenue deficit by 2008/09. The case for fiscal responsibility, both at the Centre and in the States, was made on the argument that fiscal consolidation is an essential condition for accelerating growth.
2. Some economists and critics have called into question the advisability of fiscal restraint when the public sector investment needs are so large and pressing, and have contended that in the Indian context, it is not fiscal contraction, but fiscal expansion that is growth enhancing. The Approach Papers to the Five Year Plans since have also made out a case for relaxing the FRBM targets in order to find sufficient resources for the ‘gross budgetary support’ (GBS) that the Plans demand.
3. This Paper will argue that staying the course and delivering on the FRBM targets is critical to sustaining the current growth momentum. The bedrock of sustainable growth is macroeconomic stability. Maintaining macroeconomic stability, as characterized by low inflation, stable interest rates and comfortable balance of payments, is critically dependent on redressing fiscal imbalances.
4. Three important qualifications on the