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Fiscal Consolidation

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Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock.

Key deficits of government are the revenue deficit and the fiscal deficit. The gains from the economic reforms introduced in India in early nineties could not be sustained for a much longer period. Deficits were widening and by 1999-2000 the combined fiscal deficit (of centre and states) almost reached levels of the crisis year ‘1990-91’. Sustainability of debt too was becoming a major issue. In December 2000, Government of India introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in the Parliament as it was felt that institutional support in the form of fiscal rules would help in setting the agenda for the future fiscal consolidation programme. The Twelfth Finance Commission recommended in November 2004 that state governments too enact their fiscal responsibility legislations. However, states like Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh had already enacted their fiscal responsibility legislation even before the Commission recommended so.

Implementation of Fiscal Responsibility and Budget Management (FRBM) legislation at national as well as at sub-national levels in India during the period 2005-10 helped both the Union and the States to achieve considerable correction in their respective fiscal position, which was weak prior to 2005. The global slowdown in 2008-09 and 2009-10 however adversely affected the achievement of targets specified in the legislation. The Thirteenth Finance Commission (FC-XIII) has proposed a roadmap of fiscal consolidation for both centre and states. It has specified a combined debt target of 68 % for the Centre and States, to be met by 2014-15. For the Centre, a target of elimination of revenue deficit has been set by 2013-14 and fiscal deficit is to be brought down to 3 % by the same year. For States, the Commission has recommended a fiscal road map for each state depending on its current deficit and debt levels. Accordingly, States are required to eliminate revenue deficit and reduce fiscal deficit to 3 % of their GSDP, in stages, and in a manner that all states would achieve these targets latest by 2014-15. [By the end of 2009-10, the estimated debt of Centre and States was around 79 % of GDP and consolidated fiscal deficit of Centre and States at 9.5 %, during this year].The Medium Term Fiscal Policy Statement presented along with the Union Budget 2011-12, takes forward the process of fiscal consolidation of the Centre further. While the suggested roadmap of the 13th FC puts the fiscal deficit targets at 5.7 % and 4.8 % of GDP for the years 2010-11 and 2011-12 respectively, it has now been estimated at 5.1 % and 4.6 % respectively. The recommended debt target for 2014-15 of the 13th FC award period which is 44.8 % of GDP is expected to be achieved in the year 2011-12 itself (estimated at 44.2%). However, there seems to be problems in achieving the Revenue Deficit targets. Revenue expenditure of the Central Government also includes releases made to States and other implementing agencies for implementation of Government Schemes and programmes, amounting to about 1.6% of GDP. Leaving this out, the effective revenue deficit is about 1.8%, which is being endeavoured to be eliminated in the medium-term.

The Union Cabinet chaired by the Hon’ble Prime Minister on 6 April 2016 gave its approval to Recommendations on Fiscal Deficit Targets and Additional Fiscal Deficit to States during Fourteenth Finance Commission (FFC) award period 2015-20 under the two flexibility options recommended in para 14.64 to 14.67 of its Report (volume – I). FFC has adopted the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for the States. Further, FFC has provided a year-to-year flexibility for additional fiscal deficit to States. FFC, taking into account the development needs and the current macro- economic requirement, provided additional headroom to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the States that have a favourable debt-GSDP ratio (means if debt-GSDP is not more than 25%, then an additional 0.25% fiscal deficit can be afforded) and interest payments-revenue receipts ratio (means if IP-RR is not more than 10%, then an additional 0.25% fiscal deficit can be afforded) in the previous two years. However, the flexibility in availing the additional fiscal deficit will be available to State if there is no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding year. If a State is not able to fully utilise its sanctioned fiscal deficit of 3 per cent of GSDP in any particular year during the 2016-17 to 2018-19 of FFC award period, it will have the option of availing this un-utilised fiscal deficit amount (calculated in rupees) only in the following year but within FFC award period.


References

  1. http://www.it.iitb.ac.in/~deepak/deepak/courses/eco/pdf/fiscal_consolidation.pdf
  2. http://fincomindia.nic.in/ShowContentOne.aspx?id=8&Section=1
  3. http://fincomindia.nic.in/ShowContentOne.aspx?id=28&Section=1
  4. http://indiabudget.nic.in/ub2011-12/frbm/frbm2.pdf


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