Barking up the Wrong Tree

Context:  The Union government is reviewing the Fiscal Responsibility and Budget Management (FRBM) Act and considering the adoption of a flexible and range-bound fiscal deficit target instead of a single number.

Need for range-bound fiscal deficit targeting

• Frequent deviations from the single-digit targets: In the last 10 years, the actual fiscal deficit figure turned out to be higher than the target.

• Increased focus towards range bound targeting from single digit targets:  In 2008, the FRBM Act was amended to allow 0.5 percentage point deviation under certain circumstances.

• Sharp fiscal deterioration: Difficult to achieve single-digit targets due to uncertainties like the current pandemic due to decreased revenues and increased borrowings.

• Bringing more flexibility in fiscal policy: Government can shift its attention from achieving a fiscal deficit target of 3.3 % in 2021-22 or 3.1 % in 2022-23, as projected in the latest Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement.

• In congruity with monetary policy targets: It will ensure uniformity in the manner in which inflation and fiscal deficit are targeted and would lead to less accounting engineering.

Issues in adopting range-bound fiscal deficit targeting

• Timing of the shift is criticised: The shift diverts attention away from the formidable challenges of fiscal consolidation and correction of the sharp slippages recorded in the previous two years

• Problems in comparing with previous years fiscal performances: shift will also make comparisons of the government’s fiscal performance with past years a little difficult

• Overestimation of revenues in conformity with the FRBM: is the primary contributor to the government’s failure to adhere to the promised path of fiscal consolidation. 

• Some of the faulty estimates were: 

• In six out of the last 10 budgets, the government’s actual net tax collections were short of its preliminary estimate by as much as 4 to 18%
• Slippage was recorded in seven out of the last 10 years with regard to non-tax revenues
• For disinvestment proceeds, the slippage was seen in eight of the last 10 years

Conclusion: With better revenue forecasting, it is possible to yield quicker and more durable outcomes without the need to adhere to single-digit inflation marker.