The Vision for Viksit Bharat
As India progresses towards achieving developed nation status, it is imperative to revamp its Fiscal Responsibility Framework (FRF). The roadmap focuses on fiscal discipline at both the central and state levels, aiming for a zero-revenue deficit and boosting the nominal saving rate to 33.5% of GDP. By combining domestic savings with 2% net foreign capital inflows, India can achieve a real investment rate of 38.5% of GDP, supporting a 7% real GDP growth rate with an Incremental Capital-Output Ratio (ICOR) of 5.5.
Evolution of India’s Fiscal Responsibility Framework
India’s FRF has undergone significant changes since the enactment of the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. Key milestones include:
- 2003: Introduction of FRBMA by the Government of India (GoI).
- 2004: 12th Finance Commission’s recommendations led to the adoption of fiscal responsibility legislation (FRLs) by states.
- 2018: Amendments to FRBMA set a debt-to-GDP target of 60% for the general government, split between 40% for GoI and 20% for states.
However, challenges persist. General government debt-to-GDP, which dropped to 67.8% in FY2015, surged to 89.4% in FY2021 during the pandemic. These levels exceed the 2018 FRBMA targets and necessitate a reconsideration of fiscal policies.
Recasting the FRF: Key Proposals
1. Symmetrical Targets:
- Set equal debt-to-GDP and fiscal deficit targets of 30% and 3% respectively for GoI and states, assuming nominal GDP growth of 11%.
- Provide GoI with flexibility to adjust fiscal deficits within a range of 1% to 5% for macroeconomic stabilization during economic slowdowns.
2. Zero-Revenue Deficit:
- Eliminate revenue deficits to stop government dissavings. This will align fiscal policies with the broader goal of increasing the nominal saving rate to 33.5% of GDP.
3. Crisis Management Framework:
- Establish a Fiscal Council to manage fiscal deficit deviations during crises like COVID-19.
4. Tax-GDP Ratio Enhancement:
- Increase the tax-to-GDP ratio progressively to balance revenue accounts and support fiscal discipline.
Linking Savings and Investments to Growth
The fiscal deficit is the first claim on the net supply of investible resources, derived from household financial savings and net foreign capital inflows. To achieve the 7% real GDP growth target, India must ensure a steady supply of domestic and foreign savings.
- Nominal Saving Rate: Achieve 33.5% of GDP through household and corporate contributions.
- Real Investment Rate: Augment the nominal rate with a 3% differential, yielding 38.5% real investment rate.
This framework will ensure India’s potential growth trajectory aligns with the per capita GDP goal of $14,005, marking its transition to a developed economy.
Addressing Challenges
Recasting the fiscal responsibility framework comes with challenges, including the following:
- High Debt Levels: Current debt-to-GDP ratios exceed FRBMA targets, necessitating structural adjustments.
- Revenue Deficit Concerns: Eliminating revenue deficits requires robust reforms in tax policies and expenditure management.
- Balancing Growth and Stability: Flexibility in fiscal policies must be carefully managed to avoid excessive deviations that could destabilize the economy.
The Path Forward
Achieving the ambitious vision of Viksit Bharat requires fiscal discipline and robust policies. The proposed FRF recast will empower India to balance its revenue accounts, enhance savings and investment rates, and achieve sustainable growth. Symmetrical debt and fiscal deficit targets for GoI and states, combined with a focus on crisis management and tax reforms, will pave the way for economic resilience and prosperity.