Panel on fiscal consolidation may include states in plan

New Delhi: A finance ministry panel set up to suggest a fiscal consolidation road map for the centre will also recommend a similar action plan for the states. Since the phrase used in the terms of reference of the committee is “government deficit”, it will look into both state and central government deficits, an official on the committee said, requesting anonymity. The panel has not decided whether it will only fix a cumulative

deficit target for all states or set individual targets for each one as well. The combined deficit of the central and state governments, which crossed 7% in the year ended 31 March, is being watched closely because of concerns that states may issue more bonds to finance their deficits. In addition, global ratings companies are paying more attention to state deficits when they review the nation’s sovereign rating. The committee could suggest deficit targets for both the states and the centre for overall macroeconomic stability, keeping in mind the domestic savings available in the economy, said D.K. Srivastava, chief policy adviser at consulting firm EY India.

“It is also essential as any counter-cyclical measure will not succeed unless states are also on board,” he added.

The five-member committee, headed by former secretary in the finance ministry and Bharatiya Janata Party member N.K. Singh, has been asked to submit its report by 31 October.

The panel has already initiated discussions with state governments as well as central government officials on the issue, the official said.

“The committee will make its assessment and provide its views on the expected impact of its recommendations on the general government deficit and other FRBM parameters,” the terms of reference of the finance ministry said, referring to the Fiscal Responsibility and Budget Management (FRBM) Act.

The finance ministry has also asked the panel to examine the need and feasibility of aligning fiscal expansion or contraction with credit contraction or expansion, respectively, in the economy. It has also sought to examine the need and feasibility of having a “fiscal deficit range” in place of the existing fixed fiscal deficit target.

The official said the committee is keeping an open mind on the finance ministry’s fiscal deficit range proposal. “However, it is not a given. We will reach a final decision on the matter after wide-ranging consultations,” he added.

The panel has also been asked to review the working of the FRBM Act over the past 12 years and to suggest the way forward, “keeping in view the broad objective of fiscal consolidation and prudence and the changes required in the context of the uncertainty and volatility in the global economy”.

While presenting the 2016-17 budget, finance minister Arun Jaitley had proposed the constitution of such a panel to amend the FRBM Act.

“There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, respectively, in the economy,” Jaitley had said in his budget speech.

The finance ministry, after much deliberation, decided to stick to its fiscal consolidation road map and set the fiscal deficit target for 2016-17 at 3.5% of gross domestic product, against 3.9% in the previous year.

In his budget speech, Jaitley acknowledged receiving conflicting suggestions on the fiscal consolidation road map.

“Different schools of thought have argued either in favour of fiscal consolidation and stability or for a less aggressive consolidation and for boosting growth. I have weighed the policy options and decided that prudence lies in adhering to the fiscal targets,” he said.

Economic affairs secretary Shaktikanta Das had said in an interview in March that the proposed fiscal deficit range should not be too wide. “Given the kind of volatility that is prevailing all around, I think the world over, governments need some political headroom to move the goalpost either way,” he said. “The government should have some policy space and at the same time the band for policy adjustment should not be so large that it defeats the purpose of fiscal consolidation.”