It is not the quantum of money or its statistical insignificance to our leaders' personal finances; a public reproach can go a long way in ensuring good fiscal behaviour.

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The N.K. Singh FRBM (Fiscal Responsibility and Budget Management) Review Committee Report, submitted to the finance ministry on 23 January 2017 and made public on 12 April, has recommended a fiscal future of India 2023 that holds a debt to GDP ratio of 38.7%, a fiscal deficit of 2.5%, and a revenue deficit of 0.8%. As far as the denominator (GDP) goes, these targets can be met with some effort, and be exceeded with a little more. All other parameters remaining constant, an economy that by all indications is likely to grow at 7% and more over the next six years (and longer) will not find it difficult to reduce the ratios and meet these numbers through a growth momentum in the medium term.

But in the short term, the government would not be able to take the sharp cut in fiscal deficit. As committee member and Chief Economic Advisor Arvind Subramanian notes, the path of cut-pause-cut is "difficult to explain or justify; inappropriate in the short run because of cyclical considerations; and insufficiently ambitious in the medium term in placing India's debt on a sustainable long term trajectory." The decline in fiscal deficit targets is not smooth: from 3.5% in FY2017 they fall sharply to touch 3.0% for FY2018, FY2019 and FY2020, before evening out gradually to 2.8%, 2.6% and 2.5% over the next three years. The sudden plunge in FY2018 looks statistically sound but may not be practically attainable.

That said, the four-volume report keeps the complexity that goes into working with public finances in mind, while capturing the intricacies of central and state finances, political as well as economic, into four numbers — government debt, fiscal deficit, revenue deficit, and extent of deviation through escape clauses. For governments, the task of managing four big numbers, each of which capture a multitude of smaller ones, may not be easy. The more the numbers for policymakers to track, the greater the possiblity of missing targets and shifting blame, leading to a loss of accountability. Four numbers are exciting for economists, rich grazing ground for bureaucrats — but not necessarily good for public finances. There is an argument for focused fiscal management that seems to have got lost in the report.

The fall in the first three numbers is an ongoing story that doesn't have any ending. Once the deficits are brought down, the fiscal aspiration will shift to creating surpluses. That's why we need to read this report as a work in progress. The underlying assumption that future generations will be wealthier than existing one is valid and visible, more so given the high and sustained growth India has been witnessing and will continue to experience in the foreseeable future. But the report recognises that once politics outweighs economics, fiscal profligacy is the result, one that has been afflicting India since the 1980s. Its conclusion: "Based on our consultations with stakeholders, the Committee makes the point in the report that this cannot be allowed to continue unabated."

In a world where black swans in the form of economic crises and political buyouts (serving the wealthy in the West and buying votes of the poor in India) exceed the white swans of predictable trade, financial flows and macroeconomic conversations worldwide, prudent fiscal management has attained global importance.

For a quarter of the past century, almost coinciding with India's opening up its economy in then Finance Minister Manmohan Singh's 1991 budget, macroeconomic variables in general and fiscal deficit in particular have been driving the global economic discourse.

"There has been a proliferation of fiscal rules around the world over the last 25 years. As recently as in 1990, only about seven countries had fiscal rules in place, which included the United States, Germany, Indonesia, Japan and Luxemburg," the report states. Since then, there has been a proliferation of fiscal rules around the world. "Over the next two decades, the number of countries with national and/or supranational fiscal rules surged to 76 by end-March 2012," an International Monetary Fund (IMF) working paper states. By 2015, it stood at 96, according to IMF’s Fiscal Rules Dataset. Clearly, the globalisation of sound fiscal policies is underway and India is part of it.

With its Fiscal Responsibility and Budget Management (FRBM) Act of 2003, India set sail on its fiscal balance journey, with a 3% target by 2008, which N.K. Singh's report has lowered to 2.5% by 2023. For a growing economy like India's, a 0.5 percentage point cut over 15 years is not off the mark at all and perhaps should have begun earlier — the number encloses the growth necessary to finance welfare schemes. Barring the economic crisis created by US banks and the country's lax regulators in 2008, when several countries, including India, loosened their fiscal reigns to get around the slowdown in their economies, the global path to prudence has continued across all significant geographies.

But the economic crisis on which the Indian government laid the blame for a rising deficit was not confined to the crisis alone. While steering away from the fiscal path, India's politics too contributed to the crisis. Effectively, the government used the excuse of a global slowdown to hide its increased deficit. "Extraordinary economic circumstances merit extraordinary measures. Our Government decided to relax the FRBM targets, in order to provide much needed demand boost to counter the situation created by the global financial meltdown," then Finance Minister Pranab Mukherjee said in his 16 February 2009 interim budget speech.

The N.K. Singh committee highlights that "extraordinary economic circumstances" were really created by the government's politics — not the global financial meltdown. Expenditure slippages in anticipation of the upcoming 2009 general elections had begun well before the financial crisis hit the global economy. "He [finance minister] attributed the entire difference of ₹186,000 crore (3.5% of GDP) between the fiscal deficits of 2007-08 and 2008-09 to the 'fiscal stimulus' provided cushion to the global financial crisis (GFC),” the report states. But the reasons for fiscal infractions included “populist spending policies on account of a farm debt waiver, the abrupt expansion of the MNREGA from 200 to over 600 districts, large subsidies on account of oil, food, and fertilisers, and the implementation of the recommendations of the 6th Pay Commission. Thus, a significant part of the fiscal deterioration may be attributable to the election cycle." Not the meltdown.

The bad news is that such fiscal excesses are not going to end anytime soon. From Uttar Pradesh to Punjab and Tamil Nadu to Maharashtra, fiscally-destructive farm loan waivers are raising their heads again. Worse, it is not merely the executive that is pushing for these waivers. The Madras High Court, in its 4 April 2017 judgment has not only ordered that the Tamil Nadu government should give debt relief to all farmers, not merely the small and marginal ones, but also nudged the centre to come to the aid of the state government, whose finances are "grim". The damage being wreaked on the fiscal by the politics of farm loan waivers is no longer restricted to politics; the judiciary has now embraced this profligacy and has given it a new strength and a constitutional legitimacy.

Further, Pay Commissions will continue to come and raise the cost of running governments. And as a nation addicted to subsidies, what is esseintially a political issue has become a high-cost bad economic habit. Budget 2017-18 puts food subsidy at ₹145,338 crore, fertiliser subsidy at ₹70,000 crore, petroleum subsidy at ₹25,000 crore and interest subsidies at ₹23,000 crore. The list of India's subsidies is not only long but increasing. The total subsidy bill for 2017-18 stands at ₹272,276 crore, up 4.5%. Worse, hiding behind the poor, for whom the subsidies are directed, are the not so poor. When we look at subsidies from another window, we find that benefits to the well-off through subsidies to small savings schemes, cooking gas, railways, power, aviation turbine fuel, gold and kerosene add up to ₹100,000 crore, or about 0.8% of GDP in 2015.

By pinning down the escape clauses to 0.5 percentage points, the report is bravely trying to put economic barriers before these political races to the bottom. It is telling governments "this much and no more." But as far as accountability goes, there is no incentive to follow the numbers, no penalties for breaches. In Volume II, the N.K. Singh report focuses on the international experience and the example of Canada in balancing its books stands out. In British Columbia, if fiscal targets are not met, members of the executive council face a 20% pay cut, which is reversed only when the targets are met. In Manitoba, ministerial salaries are cut by 20% in the first year of a deficit and 40% in the second year if the deficit continues. Members of the executive council in Ontario face similar cuts. It is not the quantum of money or its statistical insignificance to our leaders' personal finances; a public reproach can go a long way in ensuring good fiscal behaviour. And even presuming such an idea would have been killed at birth, it wouldn't have hurt to seed the thought in this report.

For India, an economy whose contours are defined as much by political disruption as economic ones, how much confidence can we place on recommendations that look six years ahead?

The relaxation of 0.5 percentage points in meeting targets (committee member and RBI Governor Urjit Patel's recommendation was 0.3 percentage points) in the report — due to national security, acts of war, national calamities and collapse of agriculture, structural reforms in the economy with unanticipated fiscal implications — underestimate the power of globalisation in wreaking fiscal destruction. The last point, declines in real output growth of at least three percentage points below the average for the previous four quarters, may be too high and may take fiscal flexibilty out of the hands of the Executive until it's too late. The fall in oil prices has all but destroyed the Venezuelan economy. In the low probability of them rising, economies like India that are heavily dependent on imports for their energy needs will be hit badly. This, in turn, will impact fiscal management of both the centre and the states. Will 0.5 percentage points provide the fiscal cushion? Unlikely.

Finally, the reason why managing the fisc is important is to give confidence to borrowers, international as well as domestic, that their money will be returned, that India will not renege on its debt. On this front, India is on firm ground. Unlike the emerging economies of Latin America, India has never defaulted on its debt — domestic or external. Way back in 1991, for instance, India physically shifted gold lying in the vaults of RBI in a special plane all the way to the vaults of Bank of England to provide collateral and demonstrate our seriousness in meeting debt obligations. Let's not allow these numbers to get the better of our policymaking prowess. What India needs is high growth; everything else will fall into place. The underestimation of black swans notwithstanding, implicit in N.K. Singh's fine report is this strong argument for economic growth. What he is telling the government is: growth is here to fund welfare economics — just keep your welfare politics under control: the fisc will take care of itself.

The views expressed above belong to the author(s).



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