By M Govinda Rao
The pandemic has noticed unprecedented slippage in the fiscal targets. According to the Centre’s revised estimate for 2020-21, the fiscal deficit, at Rs 18 trillion (or 9.5% of GDP), was huge and, in addition, the states would have incurred a deficit of Rs 25.5 trillion (totalling 13.5% of GDP)—such slippage was under no circumstances noticed prior to. Total outstanding liabilities is probably to be close to 90% of GDP. At the central level, the actual income collections look to have marginally exceeded the revised estimate, due to much better revenue tax and GST collections, in March but, the all round numbers are probably to stay at close to the revised estimate. In the case of state, also, much better GST collections and tax devolution and deliberate compression of capital expenditures are probably to include the fiscal deficit at about 4% of GDP.
The higher levels of deficit and debt do not come as a surprise. The catastrophe triggered by the pandemic on the lives and livelihoods of the individuals was unprecedented, and the sharp contraction in revenues at each central and state levels contributed to the steep upsurge in fiscal deficit. For the next year, the fiscal deficit of the Centre is estimated at Rs 15 trillion, or 6.8% of GDP and, assuming that the states continue to borrow close to 4% of GDP, the total government deficit will be Rs 23.9 trillion or 10.8% of GDP.
While the significant borrowings for FY21 could not have been avoided, it should be noted that RBI, to allow the government to borrow at low-price, had to manage the yields by huge infusion of liquidity from time to time via open-industry-operations and the Operation Twist. Besides substantial reduction in the repo price, the yields on government securities had to be kept low, which implies that the banks had to cut down the prices on fixed-deposits. Keeping interest prices on modest savings at higher levels produced a downward rigidity on deposit prices as the banks, for worry of losing their deposits, could not additional cut down the currently low prices.
Not surprisingly, the government wanted to align these prices, but the selection was speedily reversed for political factors. The government will have to speedily commence the course of action of fiscal consolidation to bring down the levels of deficits and debt. The Fifteenth Finance Commission has encouraged a consolidation program giving a target variety. Assuming that the base-year fiscal deficit estimate in FY21 is 7.4%, the Commission’s report states that if the financial recovery is slower than that was assessed by it, the fiscal deficit ought to be brought down from 6.5% in FY22 to 4.5% in FY26. If the recovery conforms to the assessment, the consolidation will be from 6% in FY22 to 4% in FY26. And, if the recovery is more quickly, the consolidation ought to be from 6% to 3.5%.
The income deficit is supposed to be decreased from 4.9% in FY22 to 2.8% in FY26, and outstanding liabilities are to be decreased from 61% to 56.6% for the duration of the period. In the case of the states, the indicative deficit limit is supposed to be decreased from 4% of GDP in FY22 to 3% in FY24 and stay at that level thereafter. The debt ceiling for the states relative to GDP varies from 32.5% in FY22, increases to 33.3% in FY23 and marginally declined thereafter to 32.6% in FY26. Thus, the aggregate fiscal deficit relative to GDP is supposed to be decreased from 9.3% in FY22 to 6.8% in FY26, and outstanding liabilities are supposed to be decreased from 88.3% to 85.7% for the duration of the period.
The Commission has also recommended a main restructuring of the FRBM Act by a High-Powered Intergovernmental Group to style the FRBM framework and oversee its implementation. The Union government is silent on this recommendation, but the recommendation on net borrowing ceilings for the states has been accepted in-principle. As far as the Union government’s personal fiscal deficit consolidation is concerned, the finance minister, in her spending budget speech, has set the target of 4.5% of GDP by FY26. It seems, the government either does not anticipate the recovery to be quick or desires to have a more relaxed consolidation schedule.
In its chapter titled ‘Fiscal Architecture for 21st Century India’, the Commission has produced critical suggestions for more powerful conduct of rule-based fiscal policy, enhanced fiscal management practices and institutional reforms. It has encouraged a series of Public Financial Management Reforms to have more extensive coverage and reporting, enhanced macroeconomic and fiscal forecasting, improvement in money-management practices—to improve operational efficiency and assure higher transparency and accountability. On fiscal accounting, the Commission has encouraged a time-bound program for the phased transition to requirements-based accounting and monetary reporting, towards the eventual adoption of accrual-based accounting method.
One of the most critical suggestions of Fifteenth Commission, like its predecessor, is the establishment of an independent fiscal council with powers to access records as expected from the Union and the states. The suggestions produced by the Thirteenth Finance Commission and the Fiscal Review Committee have been to have the fiscal councils be appointed by the finance ministry and have them report to it—in which case, it ceases to be independent. In contrast, the Fourteenth Finance Commission encouraged the amendment of the FRBM Act to allow Parliament to appoint the Council and have it report to it.
The Fifteenth Commission has encouraged the appointment of an independent council. Based on international practices, it has listed a quantity of indicative functions that contain (i) giving multi-year macro-financial and fiscal forecasts (ii) evaluating fiscal functionality vis-à-vis targets across levels of government (iii) assessing the appropriateness and consistency of fiscal targets in the States (iv) carrying out independent assessments of extended-term fiscal sustainability (v) assessing fiscal policy statements by governments below fiscal duty legislations (vi) advising on the circumstances for working with escape clauses (vii) policy costing of new measures with substantial fiscal implications (viii) giving analytical help to the Finance Commissions, like at state levels and (ix) publication of all their reports and underlying methodologies.
Of course, to commence with, it could be advisable to entrust the Council with a smaller sized mandate which contains undertaking macroeconomic and fiscal forecasts, policy costing of new measures with substantial fiscal implications and evaluating fiscal functionality vis-à-vis targets. This is an critical recommendation for the 21st century fiscal architecture for India, but the Union government has been silent on its implementation in the Action Taken Report.
(Author is Chief financial adviser, Brickwork Ratings, and member, Fourteenth Finance Commission. Views are private)