Keep fiscal deficit at 3% till March 2020, says FRBM panel

The government should target a fiscal deficit of 3 percent of the GDP in years up to March 31, 2020, the Fiscal Responsibility and Budget Management (FRBM) Committee has recommended.

New Delhi: A high-level FRBM panel has recommended keeping budgetary deficit at 3 percent of GDP in three years to March 2020 and setting up a new council to determine annual targets.

Calling for more focus on debt-to-GDP ratio, its recommendation for the fiscal deficit for the current fiscal is lower than 3.2 percent that Finance Minister Arun Jaitley has set for himself in the Budget for 2017-18.

The Fiscal Responsibility and Budget Management (FRBM) committee headed by former revenue secretary N K Singh suggested combined debt-to-GDP of 60 percent by 2023, 40 percent for the central government and 20 percent for state governments.

The report, which was made public today, was submitted to the finance minister before budget this year. Many of the recommendations were incorporated in the Budget for 2017-18.

While recommending 3 percent fiscal deficit for current fiscal and the next and progressively reducing it to 2.5 percent by 2022-23, the panel has provided for 'escape clauses', for deviations up to 0.5 percent of GDP, from the stipulated fiscal deficit target.

Among the triggers for taking recourse to these escape clauses, the panel has included "far-reaching structural reforms in the economy with unanticipated fiscal implications".

The government has this fiscal marginally deviated from earlier fiscal consolidation road map by deferring the 3 percent target by a year. Fiscal deficit in 2016-17 was 3.5 per cent of GDP.

The panel recommended constituting a three-member Fiscal Council to prepare multi-year fiscal forecasts and a debt and fiscal sustainability analysis that makes projections on key fiscal indicators.

It is to provide an independent assessment of the central government's fiscal performance and compliance with targets as also advise if conditions exist to permit a deviation for invocation in the escape or buoyancy clause.

The committee wanted the existing FRBM Act, 2003 and the FRBM Rules, 2004 repealed and replaced by a new Debt and Fiscal Responsibility Act.

It also suggested lowering revenue deficit to GDP ratio by 0.25 percentage points each year by bringing it down to 0.8 percent in FY2023 from 2.3 per cent in FY2017.

"If there is a sharp increase in real output growth of at least 3 percentage points above the average for the previous four quarters, fiscal deficit must fall by at least 0.5 percentage points below the target. Similar to the escape clause, this buoyancy clause can be invoked by the Government, after formal consultations and advice of the Fiscal Council," it said.

The panel provided that the central government shall not borrow from the Reserve Bank except to meet temporary excess of cash disbursement over cash receipts in any financial year.