Focus on medium-term macro-financial framework

But what are the medium-term growth and development issues? Some of those issues are potential GDP growth, achieving a $5 trillion economy, increasing public debt position, rising unemployment and inequality, achieving the Sustainable Development Goals (SDGs), increasing inflationary pressures, There are some others. Although these issues are interlinked, there is an urgent need to integrate and discuss as part of current public policy making. Now that the Union Budget for FY 2013 is soon to be presented, it may be possible to address some of these issues.

What needs to be done? In terms of potential growth, it appears to have declined even before the pandemic hit the world and we think the main reason for this is as follows. The weakening of the medium-term fiscal framework, aside from the FRBM Act, 2003, is a policy lapse that could potentially bring down GDP. While the FRBM Act of 2003 suggests targets on fiscal deficit, revenue deficit as well as public debt, the amended Act of 2018 leaves revenue deficit as the target while retaining the other two targets. As we have studied on the previous three Central Finance Commissions, and in particular the macro-financial framework, we can confidently suggest that all three goals in the 2003 Act are internally consistent and at the same time have a decent and sustainable GDP. ensure development. and in our study For the 15th Finance Commission, we have clearly shown that slashing the revenue deficit target can reduce the expected growth rate for the 15th fiscal period by an average of 250 to 300 basis points. The economic logic here is that the original FRBM Act of 2003 would ensure expenditure switching from public consumption to public investment, while the 2018 Amendment Act would ensure the exact opposite, thus, reducing growth prospects. While the 15th Finance Commission recommended all three targets, although somewhat flexible than the original Act, it was only ‘indicative’ and does not seem to be binding on the government. On a positive note, the government in its FY 2012 budget actually tried to shift the fiscal policy stance towards public investment and partly undo the damage done by the 2018 Amendment Act. We now look forward to the next Budget as well as its medium-term Expenditure Framework document which includes the proposed fiscal consolidation roadmap. In a way, as found empirically in the study cited earlier, rolling back the 2003 Act helps not only to revive potential growth, but to achieve a US$5 trillion economy, at least over the next five years. It also helps, if not by 2024-25, as envisaged, from the government. If not, as all three plus growth targets are internally consistent, we may be faced with a situation that leads to a decline in potential growth, while the public debt is below the target level of 40% (for the Centre) set by the FRBM review. could be too much. Committee.

On the SDGs front, while several initiatives have been taken by the central as well as several state governments, which are indeed very welcome, it at least gives us the impression that the response to the SDGs is only an approximation of the indices. , Various indices and rankings are being done at the sub-national and sub-state level also. However, the important aspect of allocating more resources to the various SDG sectors, as well as focusing on improving the efficiency of those public expenditures, has been taken backstage. It is also important to highlight that while achieving the SDGs will have a major impact on improving growth potential through productivity gains, and at the same time putting more pressure on public finances, it is imperative to have a medium-term macro-financial framework (budget). Is. and FRBM roadmap) are in line with the SDGs. While we did not see any reference to the SDGs in the 2017 FRBM Review Committee report, the 15th FC attempted to address this partially, although it is not clear whether the suggested FRBM roadmap is based on the resource needs and development of the SDGs. Their reaction influences the effect. and government revenue. NITI Aayog and State Level Planning Boards or similar agencies need to ensure such assessments for effective public policy making for medium term growth and development.

On the inflation front, while we largely support the RBI’s assessment of inflation expectations, in the medium term, international transmission of inflation and its impact on global growth could pose a serious risk to growth expectations in India . One way to address this is by tightening monetary policy which could prevent a nascent recovery in demand. But, to make the recovery more sustainable, there is a need to focus more on the supply side issues. Already the government has taken several initiatives under Atmanirbhar Bharat and with NIP as well as NMP, India can remove the supply-side bottlenecks at the earliest. Additionally, reduction in import duties across the board will reduce the demand-supply disparity and help in easing inflationary pressures. Many of us have written against imposition of import duty on various items. We hope we don’t see a document called ‘Customs Notifications’ As part of the upcoming budget. Such documents clearly go against the objectives of medium development. We are hopeful that the upcoming budget will continue with the good initiatives introduced in last year’s budget as well as some of the initiatives taken in the last year and bring back the medium term focus on development as well as human development.

(NR Bhanumurthy is the Vice Chancellor of Dr. BR Ambedkar School of Economics, Bengaluru. Views are purely personal)