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Focus on medium-term macro-fiscal frameworks

The government in the FY22 Budget tried to shift the fiscal policy stance towards public investments and tried to partially undo the damage done by the 2018 Amendment Act. (Reuters)Premium
The government in the FY22 Budget tried to shift the fiscal policy stance towards public investments and tried to partially undo the damage done by the 2018 Amendment Act. (Reuters)

  • While the volatility in macro indicators is here to stay with evolving pandemic conditions as well as the global economic developments, for India, there is a need to focus on medium term growth and development prospects

The GDP number for Q2 of FY22 that has shown a growth of 8.4 per cent has brought in some discussion regarding growth prospects for the current year but also for the year FY23.  There was also discussion about the whole recovery process in terms whether it is broad-based, V-shaped, K-shaped, etc.  While the recent data as well as some leading indicators do suggest a decent recovery, there were apprehensions with respect to sustainability of these numbers.  This is more so when the Covid-19 and its new variants still wrecking the global economy. While the volatility in macro indicators is here to stay with evolving pandemic conditions as well as the global economic developments, for India, there is a need to focus on medium term growth and development prospects.  Indeed, the forthcoming Union Budget could be an opportunity to focus on medium term perspective both in terms of growth as well as emerging development issues. 

But what are the medium-term growth and development issues? Some of those issues are potential GDP growth, achieving US$ 5 trillion economy, growing public debt situation, rising unemployment and inequality, achieving Sustainable Development Goals (SDGs), rising inflationary pressures, among few others. Although these issues are interrelated, there is an urgent need to integrate as well as discuss as part of the present public policy making.  Now that the Union Budget for FY23 is going to be presented soon, it may be possible to address some of these issues. 

What needs to be done?  In terms of potential growth, it appears that this has declined even before the pandemic hit the world and main reason, in our view, for this are as follows. Dilution of the medium term fiscal framework, different from the FRBM Act of 2003, is one policy misstep that could have brought down the potential GDP.  While the FRBM Act of 2003 suggests targets on fiscal deficit, revenue deficit as well as on the public debt, the Amended Act of 2018 drops the revenue deficit as a target while retaining the other two targets.  As we have undertaken studies for the last three Central Finance Commissions and especially on the macro-fiscal frameworks, we can confidently suggest that all the three targets in the 2003 Act are internally consistent and at the same time ensure decent and sustainable GDP growth.  And in our study for the 15th Finance Commission we have clearly shown that dropping of revenue deficit target could bring down the potential growth rate by 250 to 300 basis points, on an average, for the 15th FC period.  The economic logic here is that the original FRBM Act of 2003 will ensure expenditure switching from public consumption to public investment while the 2018 Amendment Act ensure exactly opposite of this, thus, reducing the growth prospects.  While the 15th FC did recommend all the three targets although somewhat flexible than the original Act, it was only ‘indicative’ and appears to be not binding on the government.  On a positive note, the government in the FY22 Budget indeed tried to shift the fiscal policy stance towards public investments and tried to partially undo the damage done by the 2018 Amendment Act.  Now we are keenly looking forward for the next Budget as well as its Medium Term Expenditure Framework Document that contains the proposed fiscal consolidation roadmap.  In a way, as empirically found in the earlier quoted study, reverting to 2003 Act not only helps revive the potential growth, but also help in achieving US$ 5 trillion economy atleast in next five years, if not by 2024-25, as envisaged by the Government.  If not, as all the three plus the growth targets are internally consistent, we may face a situation whereby potential growth declines while public debt could jump up to much higher than the target level of 40% (for Centre) as set by the FRBM Review Committee. 

On the SDGs front, while there are many initiatives both by the Centre as well as by many state governments, which are indeed very welcoming, it gives us an impression, atleast on the face of it, that the response to SDGs are mere estimating indices.  Various indices and rankings are being done both at sub-national and also at sub-state level.  However, crucial aspect of allocating more resources to various SDG sectors as well as focusing on improving efficiencies of those public expenditures appears to have taken backstage.  It is also important to highlight that as achieving SDGs will have large impact on improving growth potential, through productivity gains, and at the same time puts more pressure on the public finances, it is imperative to have a medium term macro-fiscal framework (Budgets and FRBM roadmaps) consistent with SDGs. While we have not seen any reference to SDGs in the FRBM Review Committee report of 2017, the 15th FC did try to address it partially, although it is not clear if the suggested FRBM roadmap do endogenise resource needs of SDGs and their feedback impact on growth and government revenues.  NITI Aayog and state level Planning Boards or similar agencies need to ensure such assessments for making effective public policy for the medium term growth and development. 

On the inflation front, while we largely endorse the RBI’s assessment of the inflation expectations, in the medium term, the international transmission of inflation and its impact on global growth could pose a serious risk to the growth expectations in India.  One way to address this is to tighten the monetary policy that may nick the nascent recovery in the demand.  But, to make the recovery to be more durable, there is a need to focus more on supply side issues.  Already Government has taken various initiatives under the Aatmanirbhar Bharat and with NIP as well as NMP in place, India could overcome the supply-side constraints sooner than later.  Added to this, the reduction in import tariffs across the board should ease the demand-supply disequilibrium and help mitigate inflationary pressure.  Many of us have written against the introduction of import duties on various commodities.  We do hope that we will not see the document called ‘Customs Notifications’ as part of the forthcoming Budget.  Such documents clearly goes against the medium growth objectives.   We are optimistic that the forthcoming Budget would continue the good initiatives that are introduced in the last year’s Budget as well as some of the initiatives that are taken in the past year and bring back the medium term focus on growth as well as on human development.  

(NR Bhanumurthy is vice chancellor, Dr BR Ambedkar School of Economics, Bengaluru.  Views are purely personal) 

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