In his dissent note to the Fiscal Responsibility and Budget Management (FRBM) Review Committee report, Chief Economic Adviser (CEA) Arvind Subramanian has described the fiscal deficit targets suggested by the committee as "arbitrary". Adherence to it will aggravate "booms and busts" in the economy, he has said.
The committee headed by former Revenue Secretary NK Singh, whose report was made public on April 12, has recommended that the fiscal deficit should be brought down to 2.5 per cent of the gross domestic product (GDP) by the financial year 2023 in a phased manner.
It has also suggested a revenue deficit of 0.8 per cent and a combined Centre-state debt-to-GDP ratio ceiling of 60 per cent for fiscal 2022-23, which is the end point of its medium-term fiscal road map.
"The new architecture would be a corset on fiscal policy, resulting in extreme procyclicality-aggravating booms and busts-with adverse effects on the economy," Subramanian wrote in his dissent note.
"There is a problem (with the targets) because multiple targets force policymakers to aim at too many, potentially inconsistent objectives and analytical frameworks, running the risks of overall fiscal policy being difficult to communicate for the government and comprehend for market participants," he said.
The CEA suggested the focus should be on the primary deficit until the fiscal deficit is entirely eliminated.
"This strategy will ensure that debt will remain on a downward path even over the longer term, when India's debt dynamics turn less favourable," he said.
"This would ensure a declining debt trajectory, which would reassure investors and ensure that India's debt remains sustainable even when India's debt dynamics turn less favourable in the medium term," he added.
He said the "escape clause" should have a "more reasonable growth trigger that allows for some relaxation of the deficit targets during recessions, and some tightening of these targets during booms."
"Such a simple, clear, and consistent architecture would truly be an FRBM for the 21st century."
India's fiscal deficit in the April-February period of the last fiscal ended March 31 touched Rs 6.06 lakh crore or 113.4 per cent of Budget Estimates for 2016-17-as against 107.1 per cent of Budget in the same period of last year, government data showed last month.
The government had set the target of restricting the 2016-17 fiscal's deficit at 3.5 per cent of the GDP, or to Rs.5.34 lakh crore.
In a move to support higher government spending in this fiscal, Finance Minister Arun Jaitley has pegged the fiscal deficit target at 3.2 per cent of the country's GDP in his Budget 2017-18.
The figure is higher than the earlier targeted figure of 3 per cent of the GDP for 2017-18. The target for 2018-19 has been set at 3 per cent.
The FRBM Act, 2003, is designed to institutionalise financial discipline, reduce fiscal deficit, improve overall management of public funds by moving towards a balanced budget and strengthen fiscal prudence.
The Act's main purpose was to eliminate revenue deficit of the country and bring down the fiscal deficit to a manageable 3 per cent of the GDP by March 2008, but this deadline got postponed due to the global financial crisis that unfolded late in 2007.