Ahead of the Union Budget on February 1, economists are advocating for a revamp of India’s fiscal responsibility framework to align it with the Viksit Bharat vision for 2047. They argue that the current framework, established in 2003 and amended in 2018, requires updates in areas such as fiscal deficit targets and debt-to-GDP ratios.
The need for these modifications has become more pressing in light of changing economic dynamics, including evolving investment and saving patterns, shifts in nominal GDP growth projections, and the trajectory of effective interest rates. Economists emphasise that a recalibrated framework is essential to address these altered conditions and support India’s long-term developmental goals.
On debt-GDP ratio
In particular, they want the combined debt-GDP ratio target should be retained at 60 per cent but divided equally between Centre and States at 30 percent each. In 2018, the Fiscal Responsibility and Budget Management Act (FRBM) was amended to allocate total government debt-GDP ratio between the Centre and States in ratio of 40:20. It also implicitly provided symmetric allocation of fiscal deficit at 3 percent of GDP each. Economists see this as an inconsistent combination as long as the underlying nominal GDP growth is the same for the aggregate of the Centre and the States.
The latest edition of EY Economy Watch — released on Tuesday — suggests that the total debt of the Central and State governments combined should not exceed 60 per cent of the country’s nominal GDP, with each taking an equal share of 30 per cent.
It has come up with several suggestions on amendments to FRBM including reinstate the revenue account balance as a key target for both the Central and State governments.
DK Srivastava, Chief Policy Advisor, EY India, said, “The proposed revisions to the Fiscal Responsibility and Budget Management (FRBM) Act are essential for enabling India to pursue sustainable growth while maintaining fiscal prudence. The updated framework would help eliminate government dissaving, increase investment, and create a more resilient economy that is well-equipped to meet the challenges of the future. The changes will not only address current challenges but also pave the way for India’s transition to a developed economy, achieving its Viksit Bharat aspirations.”
A recalibrated approach is vital for sustainable debt management, eliminating government dissavings, and driving investment-led growth, paving the way for India’s transformation into a developed economy, he said.
Revisiting the FRBM Act
Economy Watch suggests that a major reform is required in the FRBM Act to ensure fiscal responsibility while supporting India’s ambitious growth goals. One of the recommendations is to reinstate the revenue account balance as a key target for both the Central and State governments. This would eliminate government dissavings, which are currently a drain on resources, and create space for productive investments that are vital for economic growth.
Symmetrical Fiscal Deficit Targets with Flexibility
The EY report also suggests that both the Central and State governments should aim for a fiscal deficit target of 3 per cent of GDP each. However, to handle unexpected challenges like economic slowdowns, the Centre should have some flexibility, allowing the deficit to range between 1 per cent and 5 per cent of GDP. In case the crisis is much bigger, such as the Covid crisis, suitable variation in GoI’s and States’ fiscal deficit beyond the above range may be considered by an appropriate body such as a fiscal council. This approach balances fiscal discipline with the ability to address extraordinary situations.
Another key recommendation is to eliminate revenue deficits entirely. This would free up funds for productive investments, with combined government investments expected to reach 6 per cent of GDP by FY2048.
Meanwhile, on expectations of fiscal consolidation in upcoming budget, Devendra Kumar Pant, Chief Economist and Head of Public Finance, India Ratings and Research, said that Ind-Ra expects the Central government to adhere to its FY26 fiscal deficit target of 4.5 per cent of GDP. This is the same as given in the earlier announced fiscal consolidation roadmap.
“With Indian economy experiencing a tighter fiscal policy, the fiscal consolidation post FY26 is expected to be at slower pace than what was observed in the last couple of years”, Pant told businessline.