Nagoya, Japan: Nand Kishore Singh has served in various capacities including as a member of Parliament in the Rajya Sabha and more recently as chairman of the Fiscal Responsibility and Budget Management (FRBM) Committee, which submitted its report to the government ahead of the presentation of this year’s budget.
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Hours after the government made the report public on Wednesday, Singh spoke to Mint on the sidelines of an India Conference in Chubu 2017 being held in Nagoya, Japan. He dwelled on the importance of the panel’s recommendations, the paradigm shift in fiscal management it ordained and the increasing importance of states as stakeholders. Edited excerpts:
Does this mark a paradigm shift in fiscal management?
I didn’t want to put it exactly like this, but yes it is. The report needs to be seen as the broad architecture to move the country towards a new fiscal era.
For three reasons. First, I think that we have changed over from excessive preoccupation with fiscal deficit to debt becoming the principal anchor. The rest of the world, particularly rating agencies repeatedly pointed out to us that we look at issues of debt; and India was not only misaligned on its fiscal methods, it is fully misaligned on its debt. This will be one of the factors that will contribute to India’s improved credit rating. We have studied this in detail and specified that the optimum debt-to-GDP (gross domestic product) ratio is 60%.
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Second, we are suggesting institutional changes. Earlier the administration of the FRBM Act was entirely in the domain of the government and did not have the analytical inputs of a robust independent organisation, like many countries have, of a fiscal council—which does fiscal analysis round the year and keeps the government informed in case it needs to undertake corrective action. It also firewalls the decisions by bringing in greater analytical rigour whether conditions are appropriate for triggering of the escape clause.
Third, the architecture of the new regime is embedded in a new and revised legislation which repeals the existing FRBM legislation.
When you say debt, you include even external debt?
Yes. It includes total debt. By the way external debt is not a big worry.
What is the present size of the debt-to-GDP ratio?
It is closer to about 68%. And this needs to be brought down to 60%.
How much will that be?
Today about 1% of GDP is about Rs175,000 crore. So that will make the target eight times of this—and this is a huge number. Achieving this will be a significant challenge, but this is entirely possible.
Are there any assumptions underlying your math?
One assumption is that we have assumed a nominal GDP growth of 11.5%. The other is that inflation will remain in the range of 4%. If both these variables change then the path will have to be recalibrated.
You have opted against prescribing a band for the new fiscal metric?
In most countries which have robust Parliamentary systems, if you give a range there is a tendency to operate on the upper bound. So what we have done is give fixed targets consistent with the meeting of the debt-to-GDP target of 60% by the year 2023; and the fiscal deficit for each year has been calibrated to achieve this metric. So there is a glide path in that direction.
When and how will the escape clauses get triggered?
We have prescribed a procedure such that this is not routinely invoked.
So, who has to undertake a bulk of the adjustment—the centre or the states?
As of now, it will be easier for the central government to achieve the target.
How will the proposed Fiscal Council work and what is the need for it?
We got presentations made on the best international experience on what has been loosely defined as second generation fiscal rules. One of the centrepiece is not escape clauses that most countries have but a Fiscal Council to do continuing analytical work on fiscal behaviour, acting in an advisory role to the ministry of finance and also of being available to the government to determine of the conditions were really appropriate for invocation of some of the trigger clauses.
Will states be a key player in the emerging federal polity?
There is no doubt about that. People do not look at disaggregated debt of the centre and the states. Investors, ratings agencies look to debt for the country as a whole. States have become very important players. You now have a very good overall symmetry—you have the Monetary Policy Committee and if you do have a Fiscal Council, you could perhaps see greater congruence between monetary and fiscal policy.
The current state of finances of the states, hardly warrants optimism to the future scenario you are laying out as responsible stakeholders.
The issue of state governments managing their finances will deserve very serious attention and priority action. How this say balancing is to be done is something that the next finance commission should devote attention. I do believe that the finance commission could consider an interim report.
How do you play farm loan waiver in this context? It is becoming a phenomenon.
If the obligation for the farm loan waiver is with the state governments, the central government has next to nothing to do with it. But it does impact the move towards 60% debt cap and therefore requires close monitoring and caution to ensure that overall trajectory that has been articulated by the FM (finance minister) does not get misaligned. But let us not exaggerate the issue.