The Government appointed a five-member Committee in May 2016, to review the Fiscal Responsibility and Budget Management (FRBM) Act and to examine a changed format including flexible FRBM targets. The Committee formation was announced during the 2016-17 budget by FM Arun Jaitely.
Structure of the Committee
The panel, headed by former Member of Parliament and former Revenue and Expenditure Secretary NK Singh has four other members – Chief Economic Advisor to the Finance Ministry Arvind Subramanian, former Finance Secretary Sumit Bose, Deputy Governor of the Reserve Bank of India Urjit Patel and NIPFP Director Rathin Roy.
Significance of the Committee
The Committee was an outcome of intense debate on FRBM implementation. There was difference of opinion about the need for adopting a fixed FRBM target like fiscal deficit. Several economists argued that FRBM target which is usually expressed in terms of fiscal deficit, need not be followed during the time when government has to spend high to fight recession and support economic growth.
Some others argued that a target oriented fiscal deficit (as under FRBM) is necessary to ensure fiscal discipline.
During Budget speech in 2016, Mr Jaitley expressed this debate: “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.”
The FM’s voice implicitly demanded a flexible FRBM target which allows higher fiscal deficit during recessionary/difficult years and low targets during comfortable years. Such an arrangement will give more breath to the government to borrow more (more fiscal deficit) during tight years.
Hence a rethinking on FRBM was initiated by budget 2016 and to make an expert opinion, the NK Singh Committee was formed.
NK Singh Committee’s responsibility
The Committee’s following four terms of references clearly tells its responsibility.
1. Review of the running of FRBM in the past and suggest changes to meet contingencies: The Committee has to review the working of the FRBM Act over last since its enactment in 2003 or during the last 12 years. Here, it has 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.
2. Examining various associated aspects: The committee has to look into various aspects, factors, that have to considered while determining the FRBM targets.
3. Examining the feasibility of flexible Fiscal Deficit Target: The Committee has to look into the possibility of a ‘fiscal deficit range’ or flexible fiscal deficit target instead of a fixed target (eg. 3% of GDP as at present) as the target in place of the existing fixed numbers (percentage of GDP) as fiscal deficit; and
4. Aligning fiscal activities with credit cycle: Here, the Committee has to search whether the government need to align or adjust its fiscal expansion/contraction with credit expansion/contraction in the economy.
Besides looking into the existing FRBM Act in the light of contemporary changes, the Committee has to consider past outcomes, global economic developments, best international practices etc., while recommending the future fiscal framework and roadmap for the country. It has to consider the recommendations of the Fourteenth Finance Commission and the Expenditure Management Commission as well.
Report submitted by the Committee
The Committee has submitted its report to the Finance Minister on January 23rd 2017. Details of the report is yet to be published by the Ministry. But the it has four volumes:
- Volume 1- Addresses the issue of fiscal policy and roadmap, international experience and the committee’s recommendations on it.
- Volume 2- Refers to view of international organizations like OECD, World Bank, ILO which made presentations before the panel.
- Volume 3 – Deals with Centre-state issues. Each state and the Centre had given their views to the panel, but direct relationship between state-related fiscal issues were “somewhat tenuous”, Singh said. “Responsible growth, debt and fiscal framework, debt issues are pretty frontal in that,” he added.
- Volume 4- Includes views of domain experts, both national and international, and what they believe an appropriate fiscal policy would be.
Government is examining the Report to take the appropriate action. At the same time, the Report is going to be important in the context of the demonetisation created fiscal stress and the resultant fiscal difficulties for the 2017 budget. It is believed that the Finance Minister may here depend on the Committee’s recommendations to opt for a flexible fiscal deficit target.