#dnaEdit: Igniting growth

Chairman of Expenditure Management Commission Bimal Jalan has raised a crucial point with regard to the Fiscal Responsibility and Budget Management (FRBM) Act: whether there should be a statutory limit to fiscal deficit.

He implied that this is a call that the government of the day has to take. From 2009 on, finance ministers have been apologetic about crossing the deficit limit prescribed in the FRBM Act, and in the last three budgets, the assurance given by the finance ministers — P Chidambaram in 2013, Arun Jaitley in 2014 and 2015 — is that of fiscal consolidation and of containing the deficit. The Medium Term Fiscal Policy statement as mandated in the FRBM Act has stated that the fiscal deficit will be brought down to 3.5 per cent from 3.9 per cent in 2016-17. 

The finance minister is unlikely to take Jalan’s indirect advice that there is no harm in being flexible about deficit targets. Jalan was, of course, careful enough to avoid suggesting repeal of, or amendments to, FRBM Act. There is a clear hint that Jaitley wants to walk the straight and narrow path of fiscal consolidation. 

There is near unanimity among experts regarding the need for a large dose of public investment to get the economy moving. Addressing the state finance ministers conference, Jaitley has urged the state governments to spend more on infrastructure and poverty-alleviation programmes. He is, of course, saying that due to the greater devolution of funds to states as mandated by the Fourteenth Finance Commission, the state governments have greater elbow room for public expenditure. This was also a clear hint that the central government would not go in for public expenditure and public investment. The central government is hesitant and rightly so. It does not take much time for the government to get into the red as it were, and it is better to err on the side of caution. Jaitley is inclined to be financially conservative. The finance minister is reluctant to raise taxes, and, therefore, he wants to keep expenditure on a tight leash. Jaitley has indicated that he would refrain from populism in the Budget.

As the world economy struggles to get out of recessionary blues, economists are arguing for greater public investment. Well-known economist Jeffrey Sachs has pointed out that “most governments (the US is a stark case) are chronically under-investing in long-term education, skill training, and infrastructure. Private investment is falling short mainly because of the shortfall of complementary public investment. Shortsighted macroeconomists say the world is under-consuming; in fact, it is underinvesting.”

Finance ministers of emerging economies like that of India, are caught in a bind. They cannot spend for fear of triggering inflation, and if they do not spend, the economy is unlikely to get going. It is in this kind of an unenviable tight-spot that Jalan’s suggestion that governments should take a call on fiscal deficit, and that statutory limits are unrealistic, makes sense. What the Modi government needs to find is the best way of spending the money, which it may have to borrow if necessary. This would mean that the FRBM limits may have to be breached. Contrary to received wisdom about controlling governmental expenditure, the need of the hour seems to be that of loosening the government’s purse strings.