Debt Targets Built on Quicksand

Fiscal deficits are back in the news. After several years, questions are being posed about the correct posture towards government expenditure. In March 2016, a committee of distinguished public servants reviewed the framework of the Fiscal Responsibility and Budget Management (FRBM) Act, 13 years after it was launched. The purpose was to think about the act and to frame new rules as a result. The N K Singh Committee report (FRBM–RC 2017) received little attention, coming as it did on the heels of the demonetisation decree two months earlier, and would certainly have commanded more notice in another time. It has nevertheless come back into public prominence in the recent past, given the discussion of fiscal stimulus being considered by the current government. There has been a near universal sense of panic about this impending change in stance in the business papers (see, for example, Chakravarty 2017) and many point to the N K Singh report as being a guide for this discussion. This, despite several news items that point to a serious slowdown in the economy. Here, a short critique of the report’s framing is presented. It is suggested that, at this juncture, there is indeed a case for fiscal spending that runs counter to the recommendations of the committee.

Perhaps, the most appealing aspect of the report is its suggestion to repeal the FRBM Act. On this, it is on firm ground. There is now, by and large an understanding that an ad hoc reduction of the fiscal deficit to 3% of gross domestic product (GDP) has no reasoned argument behind it and cannot really be followed when there are exigencies such as those that occurred during the global financial crisis. Having noted this, the committee suggests its own set of policies that are problematic.