New Delhi: The N.K. Singh panel to review India’s fiscal discipline rules has recommended a debt-to-GDP ratio of 38.7% for the central government, 20% for the state governments together and a fiscal deficit of 2.5% of GDP (gross domestic product), both by financial year 2022-23.

The committee has prescribed a so-called glide path to these targets—steady progress towards them—and also suggested that there be some flexibility in the deficit targets on both sides, downwards when growth is good and upwards when it isn’t.

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The panel has recommended enacting a new Debt and Fiscal Responsibility Act after repealing the existing Fiscal Responsibility and Budget Management (FRBM) Act, and creating a fiscal council.

In 2016-17, India’s debt-to-GDP ratio for the central government was 49.4% and fiscal deficit at 3.5% of GDP. The government is hoping to end 2017-18 with a fiscal deficit that is 3.2% of GDP, marginally higher than the 3% mentioned in the FRBM Act.

The committee’s report, which was submitted before the Union budget presented on 1 February, was made public by the finance ministry on Wednesday. There’s no indication as to whether the government will accept these recommendations.

The proposed three-member fiscal council will prepare multi-year fiscal forecasts for the central and state governments (together called the general government) and provide an independent assessment of the central government’s fiscal performance and compliance with targets set under the new law.

The committee favours a debt-to-GDP ratio of 60% for the general government by 2022-23, 40% (38.74%) for the central government and 20% for state governments. Within the framework, the committee has recommended adopting fiscal deficit as the key operational target consistent with achieving the medium-term debt ceiling, at 3% of GDP for three years, between 2017-18 and 2019-20. Revenue deficit-to-GDP ratio has been envisaged to decline steadily by 0.25 percentage points each year from 2.3% in 2016-17 to 0.8% in 2022-23.

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However, to deal with unforeseen events such as war, calamities of national proportion, collapse of agricultural activity, far-reaching structural reforms, and sharp decline in real output growth of at least 3 percentage points, the committee has specified deviation in fiscal deficit target of not more than 0.5 percentage points. It has noted that Reserve Bank of India governor Urjit Patel had favoured 0.3 percentage points. However, the government has to commit to come back to its stated path of fiscal discipline the following year.

Similar to the escape clause, this buoyancy clause can be invoked by the government after formal consultations and advice of the fiscal council.

“If there is a sharp increase in real output growth of at least 3 percentage points above the average for the previous four quarters, fiscal deficit must fall by at least 0.5 percentage points below the target," the committee said.

Interestingly, one of the members of the committee, chief economic adviser Arvind Subramanian, didn’t agree with the targets and called for a more relaxed fiscal policy in his dissent note. “A medium-term fiscal deficit target of 2.5% of GDP is based on a conceptual framework unrelated to the debt objective and based on calculations that are hard to justify," he said in the note. Subramanian’s recommendation is to eliminate the government’s primary deficit over the next five years.

Angel Broking said in a statement that the lower fiscal deficit trajectory suggested by the committee is positive from the point of view of India’s sovereign credit rating and the external value of the rupee and would also have a salutary effect on foreign portfolio investment flows into India.

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