Beyond Fiscal Prudence and Consolidation

Since sustainable deficit could be different than the numeric fiscal rule, a review of the Fiscal Responsibility and Budget Management Act is timely and important. However, such a review should bear in mind that macro-stabilisation is a central function and the burden of fiscal adjustment should squarely fall on the union government keeping state debt and deficits withinFRBM limits. Maintaining the higher tax to gross domestic product ratio of last year will be key for fiscal prudence in 2016-17.

The Union Budget 2016–17 has been hailed as fiscally prudent. Many have argued that this budget has restored credibility of fiscal policy by sticking to the targets of deficit reduction as laid out in the Medium Term Fiscal Plan of 2015–16. If the fiscal consolidation envisaged in Budget 2016–17 continues, it would bring the fiscal deficit to the Fiscal Responsibility and Budget Management’s (FRBM) stipulated target of 3% of gross domestic product (GDP) by 2017–18. The objective of this article is to discuss the credibility of fiscal policy by examining in detail the budgetary arithmetic.

Although, adhering to the fiscal rules and targets has been the only mantra in India since the enactment of the FRBM Act, for the first time within the government there were arguments in favour of relaxing the fiscal consolidation targets in the mid-year review of Indian economy (Ministry of Finance 2015) and in the Economic Survey (Ministry of Finance 2016). The government has adhered to the fiscal consolidation path of deficit reduction. We analyse whether adherence to fiscal deficit targets was fiscal discipline or a revenue buoyancy-led fiscal adjustment bonanza received in 2015–16 due to benign petroleum prices. We also examine whether revenue-led fiscal consolidation is possible in 2016–17. We also examine the implications of the announcement to review the functioning of the FRBM Act. What are the short-term macroeconomic implications of fiscal consolidation and the long-run impact on key spending and fiscal sustainability? Finally, is the Budget 2016–17 a redistributive budget focused on the farm sector and agriculture?