Is a new fiscal responsibility law needed?

The government will soon take a decision on whether the country needs a new law for fiscal consolidation replacing the existing 14-year-old Act.

Sources said the Finance Ministry will take a call on whether to amend the existing law or draft a fresh law after examining the NK Singh committee report in detail.

“The report is being studied in detail as there was not enough time to do so before the Budget. But it has called for many far-reaching changes and it may be best to draft a new Bill as the existing law is over a decade old,” noted a senior government official.

The government-appointed expert committee led by former Revenue Secretary NK Singh to review the Fiscal Responsibility and Budget Management Act, 2003 is understood to have suggested a plethora of changes in not just the fiscal and revenue deficit targets but also in the overall fiscal consolidation strategy.

There is a view within the government that it may be better to draft a fresh law, incorporating suggestions of the committee, as the current law has seen many rounds of amendments and is not in tandem with the current economic situation. Further, there have already been some deviations from the current law.

For 2017-18, the Budget has pegged the fiscal deficit at 3.2 per cent of the GDP and the revenue deficit at 1.9 per cent of the GDP. The FRBM Act mandates that the fiscal deficit should be lowered to 3 per cent in the next financial year and the revenue deficit should be 2 per cent. Effective revenue deficit is also estimated at 0.7 per cent, in contrast to the FRBM Act that has called for eliminating it by 2017-18.

However, alternatively, the government could choose to amend the existing FRBM Act and notify the changed fiscal and revenue deficit targets.

Apart from examining the Centre’s finances, the NK Singh committee in its four volume report titled ‘Responsible Growth – Debt and Fiscal Framework’, has reviewed State finances and has also provided an international perspective.

Finance Minister Arun Jaitley had in the Union Budget on February 1 announced that the government has taken into account the report, which has suggested maintaining the fiscal deficit at 3 per cent for the next three years, while announcing that it needs to be examined in detail.

The Budget also noted that the committee has favoured a debt to GDP of 60 per cent for the Centre by 2023, consisting of 40 per cent for Central government and 20 per cent for States. It has also provided for ‘escape clauses’, for deviations up to 0.5 per cent of GDP, from the stipulated fiscal deficit target.

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