Home / Opinion / Views /  Indecision over India’s fiscal law ought to end

In a country rife with relativist attitudes, with context accorded priority, only mild murmurs are raised by successive deviations from the aims of our fiscal law enacted in 2003. While the demands of India’s Fiscal Responsibility and Budget Management (FRBM) Act have patently proven unrealistic, as seen during the covid crisis, indecision over its retention as a statute seems to persist in policy circles. So, yet again, the Union finance ministry had to invoke an escape clause on its budget deficit proposal of 5.9% of GDP for 2023-24. This is lower than this year’s 6.4%, but nearly twice the FRBM limit of 3% anyway. The ministry’s explanatory note on this gap refers to global headwinds faced by our economy soon after the pandemic eased and makes a case for fiscal flexibility, so that action can be taken to grant Indian growth resilience against shocks. While spending our way out of the covid squeeze was necessary, the wisdom of a fisc tightened as slowly as planned is unclear. What Parliament must do, nonetheless, is subject the FRBM Act to a full legislative review. Rather than cry crisis year after year even as the fiscal framework gathers dust, we should either revise or repeal it.

The case for FRBM revision goes by the rationale that rules must restrain recklessness but also make space for fiscal policy to play a counter-cyclical role. If the economy’s growth goes into reverse or weakens below its trend, the law must let the fisc expand to impart a boost; as national output picks up, however, the fisc should be tightened, a task typically made easier by rising revenue. Since deficit control acts in favour of debt sustainability, price stability and inter-generational equity, without which we would slip into a debt trap and punish people not just today but perhaps for years to come, we must always deter central expenditure that is fiscally reckless. Also, fiscal leeway must be kept in reserve to tackle future threats. A tight fisc is good. But should specific legal caps be imposed on our deficit and debt ratios? At the pandemic’s peak, the Centre’s fisc was more than thrice the 3% FRBM target, with debt piled above the ceiling too.

Our fiscal law’s big flaw is that its targets are arbitrary, basically, even if backed by a few studies. Granted, arbitrarily-set goals can play a heroic role. Take Europe’s euro project a quarter century ago. As the EU went in for a common currency, its economies sought to lock in their exchange rates at fair levels. For this, they agreed to converge on key macro settings like inflation and budget gaps. The process had its share of drama, but euro champs managed to stare down eurosceptics and made a success of their 1999 monetary union. As a side effect, it gave the eurozone treaty’s 3% fiscal cap a halo of uber-prudence. In times of normalcy, 3% of annual output can be assumed to work as a reasonable safety limit for a state to spend in excess of its revenue. Data records may even show a drop-off in risks of instability with such a tight fisc. Yet, an economy can get shaken in various ways and there might be no saying what the optimal response is, especially if too many variables go haywire. Since we deal with estimates, these readings can’t claim exactitude either. No wonder stiff fiscal limits are prone to fail the twin tests of time and context. This being so, we must ask whether India needs a fiscal law at all. What it takes to run an economy, after all, is a judicious mix of wisdom and judgement. Policy pre-sets make little allowance for that.

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