The five-member NK Singh panel set up to review the Fiscal Responsibility and Budget Management Act (FRBM) 2003 has gone about its task in a workmanlike manner, but falls short on breaking new conceptual ground. The burden of its message is that fiscal targets are “operational goals”, or a means to keeping the debt-to-GDP ratio in check. Now at 68 per cent, the panel suggests that the ideal ratio is 60 per cent. To this end, the panel suggests a glide path to reduce the fiscal deficit to 2.5 per cent of GDP by FY 2023. The panel recommends an “escape clause” or deviation from the target (0.5 percentage points) in the event of a recession or agricultural crisis. It suggests the creation of an “independent” fiscal council to manage the fisc. Yet there is no escaping the feeling that the panel skirts key criticisms of the FRBM law. It has stuck to a conservative approach to managing public debt. That such an approach can constrict the space for public expenditure at a time when private investment is not forthcoming, as over the last five years, needs to be considered. The Approach Paper to the Eleventh Five-Year Plan points out that taking a stern view even of revenue expenditure can be counterproductive for its effect on social spending. The sanctity of the fiscal deficit target of 3 per cent of GDP remains unclear, reinforcing the view that it has been lifted from the Maastricht treaty. This is not to argue that the deficit is irrelevant, but that the macroeconomic context is crucial. The Government must be in a position to turn on the spigots when needed.

The dissenting view articulated by Chief Economic Advisor Arvind Subramanian needs to be taken seriously. As Economic Survey 2016-17 argues: “A mechanical comparison (of the debt-to-GDP ratio) is not an appropriate way of assessing India's strength. If fiscal and debt sustainability is about confidence and trust as revealed in the ability and willingness of governments to limit their debt levels and pay them off without disruption...then India's record is very good.” Subramanian has suggested targeting the primary deficit (the difference between revenue and expenditure excluding interest repayments) instead, since it implies whether the Government is collecting enough revenue to meet its running costs. The Survey points out that at high rates of growth, India’s primary deficit ought to have been lower. The Government “is dependent on growth and favourable interest rates to contain the debt ratio” — an admission of vulnerability to shocks.

It is, therefore, important to adjust deficit targets, taking into account the limits of monetary policy in a downturn. Deficit management should be more revenue than expenditure driven. India cannot afford a squeeze on capital and social expenditure. Its tax to GDP ratio of 16 per cent (Centre and States) can surely improve, thanks to GST and other tax reforms.