Fiscal deficit target setting may see sweeping changes 2 min read . 04 Sep 2020

 

Fiscal deficit target setting may see sweeping changes

2 min read . 04 Sep 2020Gireesh Chandra Prasad

FFC discusses deficit target range, debt-to-GDP target as states, Centre borrow more

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Finance Commission

NEW DELHI : A fundamental revisit of the way India sets its fiscal deficit targets may be on the cards, with the Fifteenth Finance Commission (FFC) discussing ways to do so at a meeting on Friday. The Commission will submit its report on revenue sharing between the Centre and states to the President by October-end.

At a press briefing, FFC chairperson N.K. Singh said the panel members and invited experts discussed the issue of revamping the way fiscal deficit targets are set.

One idea discussed, Singh said, is to shift to prescribing a range of fiscal deficit rather than a specific target. “Looking at the uncertainties, I did say that I felt there was merit in looking at a range than looking at a number," Singh said.

The commission also discussed the need for giving a fixed target, which could be the mean of the specified range such as the inflation target of Reserve Bank of India, to prevent any bias for taking the upper end of the range as the target. Accordingly, the target to be set could be 2.8-3.2% instead of say, 3%, Singh said, citing hypothetical numbers.

The plan to review the framework for fiscal prudence comes at a time when the spending needs of the Centre and states have gone through the roof, while economic growth and revenue receipts have plummeted.

Borrowings by central and state governments is set to go up significantly this year, reflecting the fiscal challenges faced by policy makers. This fiscal, the combined debt of Centre and states could be as high as 82-83% of gross domestic product (GDP), way above the preferred 60%, he added.

Singh said that on setting the fiscal consolidation roadmap, many felt that the debt-to-GDP target of the general budget (of Centre and states together) was an area that needs to be revisited. “Debt-to-GDP ratio (this year) may be way upwards of what it has historically been," Singh said, adding that the Fiscal Responsibility and Budget Management Committee he had headed, had suggested 60% to be the preferred debt to GDP ratio.

The Centre has raised its borrowing target for the current year by over 53% to ₹12 trillion, while states’ borrowing limits have been raised from 3% of gross state domestic product (GSDP) to 5%, subject to certain riders. Also, a plan to help states to meet their goods and services tax (GST) shortfall being discussed in the GST Council involves extra borrowing beyond this limit.