For Fiscal Discipline

While preparing the Union Budget for 2016/17, Finance Minister Arun Jaitley had found himself on a sticky wicket. He needed more money to fund the government's development plans without disturbing the fiscal consolidation roadmap that he had set in the previous Budget.

In Budget 2015/16, Jaitley had promised to bring down India's fiscal deficit to 3 per cent of GDP over a three-year period. To his credit, Jaitley had met the first-year target of 3.9 per cent - down from 4.1 per cent in the previous fiscal - comfortably. However, this time round, he was finding it difficult to stick to the 3.5 per cent target for 2016/17, following demands for an increase in public investment to trigger economic growth. He came up trumps yet again through a mix of accounting jugglery and increased revenue projections, despite a 15.3 per cent rise in allocation for planned expenditure (Rs 5.5 lakh crore).

Jaitley was not the only finance minister to have faced this dilemma. P. Chidambaram, during his tenure as finance minister, had to take the blame for compromising on development and giving more importance to fiscal discipline. His predecessor Pranab Mukherjee was blamed for exactly the opposite. In fact, every finance minister who presented the Budget after 2003, the year the Fiscal Respon-sibility and Budget Management (FRBM) Act was introduced, had to either stick to a pre-determined fiscal deficit level, or face the ire for not treading the fiscal discipline path.

The very purpose of the FRBM Act was to impose stringent fiscal discipline on the central government in its overall fiscal and macroeconomic management operations. The Act called for transparent fiscal management systems and long-term fiscal stability. The flipside, however, was the lack of flexibility when it came to addressing growth and development needs through increased public spending.

On May 17, the NDA government found a way to tackle this problem. It formed a five-member committee headed by BJP leader and ex-bureaucrat N.K. Singh to comprehensively review the FRBM Act. The panel will submit a new roadmap by October 31.

It must suggest a way to do away with the system of limiting government expenditure to meet its fiscal roadmap. It will examine the feasibility of having a 'fiscal deficit range' instead of the existing fixed numbers (percentage of GDP) defining the deficit target. The range could also be altered in accordance with national and international economic realities.

India's move to have an independent committee to look into FRBM roadmap is, however, not unique. International Monetary Fund lists over two dozen countries where a permanent institutional structure, or an independent Fiscal Council, exists to advise governments on fiscal prudence in a dynamic manner.

The FRBM committee may be a temporary arrangement, but its success can translate into a permanent body that would monitor the implementation of the suggestions it makes. Today, Jaitley is solely responsible for maintaining or ignoring the fiscal deficit targets. If the committee's recommendation leads to the establishment of a permanent panel, that will save finance ministers from facing the tricky situation of honouring fiscal targets at the cost of development.