India is not a country of sticklers, by and large. It explains why the Union finance ministry’s economic review for September could use the word ‘solid’ to describe the Centre’s fiscal position, which, thanks to “steady revenue growth” and “prudent rationalisation of revenue expenditure,” implies that it will meet its 5.9% deficit target for 2023-24, even though this inflow-outflow gap as a proportion of GDP is almost twice the limit specified by the country’s fiscal law. Of course, the 3% cap imposed by the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 has long acquired the look of a relic. Moreover, it always had an escape hatch for crises like covid. Even more pertinently, it’s not as if awkward laws do not get glazed over. In the case of Article 377, for example, the judiciary in 2018 wisely chose to ‘read down’ a part of the penal code that outlawed gay sex. Since legislative action to fix the law would have involved a political rigmarole, that was taken as a practical way out, relieving our leaders of any need to take a stance. Yet, placing the fisc in the same category of touchy subjects is hard to justify. In fact, it’s about time the government decided whether to repeal or modify the FRBM Act.
With a stated glide path that aims to reduce the fisc to less than 4.5% of GDP by 2025-26, half a decade past the covid crisis, the government has shown no pretence of abiding by what it clearly considers a dead-letter law. That fiscal policy should not be placed in such a stiff legal straitjacket was so even two decades ago. While it is true that profligacy has long been the bane of Indian public finance, spelling excessive inflation as well as costly credit for the private sector, it’s equally obvious that enlarged state outlays play an often-vital role in pumping money around an economy in trying times, as envisaged by Keynes. An ideal policy frame, thus, would be set for counter-cyclical action: that is, with a fiscal stimulus imparted to cushion an economic slump if and when needed; and state expenditure held back to let private impulses expand output when market forces are doing an apt job of resource allocation. Overall, what balance is kept over an extended period would be shaped by the ratio of private and public roles that policymakers deem fit. This may go by ideology. But still, regardless of whether a high level of state spending is expected to ‘crowd’ private investment ‘in’ or ‘out,’ an arbitrary limit for a budget deficit was always a dubious idea. It need not have taken a pandemic to expose fiscal rigidity as faulty. Every economy needs a spender of last resort and it’s hard to foretell exactly how much spending may be needed.
What’s remarkable is how our mega deficits since covid struck has sent neither inflation nor lending rates into double-digits, despite a robust recovery in commercial activity and an uneven-but-evident spring-back of consumer demand. Although the central bank has kept a vigil on monetary conditions (not to mention allegations of dodgy data), recent experience suggests that FRBM hawks had misjudged how much the Centre can spend without setting off macro instability. About a decade ago, loose policy had severe consequences. This time, the impact has been relatively benign. Unless it’s still too early to say so. What if the pandemic’s contortions are still to be fully resolved? Either way, given the risks of overspending, it would be prudent of the Centre to tighten its fisc faster than its glide path requires.
