Government spending is the art of fine balance. Too little and the state will fail in some of its responsibilities, especially those towards the poor and underprivileged. Too much could result in a macroeconomic crisis.
India moved away from a discretionary approach to fiscal management with the passage of the Fiscal Responsibility and Budgetary Management Act in 2003. The law was passed by a National Democratic Alliance (NDA) government, but, rarely for an Indian legislation, had bipartisan support. Now, 14 years later, another NDA government has received a report from a committee headed by veteran bureaucrat N.K. Singh on “a debt and fiscal framework for 21st century India” (as the document is subtitled).
The report, titled ‘Responsible Growth,” is based on sound fiscal economics. It was always clear, even before states embarked on a rash of farm loan waivers, that state finances were not getting the importance, and the scrutiny they deserved. Imprudent spending by the states could derail the central government’s own efforts at fiscal moderation. The report addresses this by makes public debt (of the Centre and the states) the focus, moving away from the traditional target of the fiscal deficit, although it retains the latter as an objective of the yearly government budget.
What of so-called black swan events – a global macroeconomic crisis or a severe drought? The new fiscal regime recommended by the Singh committee has a degree of flexibility, and allows the government an escape clause in case of external or internal shocks to the system. The report adds that the decision on whether a shock is severe enough to trigger the escape clause will be made by a new body, the fiscal council, which will also monitor government policy to measure the medium-term impact on finances.
There are minor definitional and operational quibbles with some of the recommendations of the committee and also the major, and possibly political, challenge of assigning public debt targets to states, but if the finance ministry accepts the report, India will have a working, pragmatic, reformist, and model fiscal regime.
Interestingly, the idea of a fiscal council has been proposed at a time when the country has created a monetary policy council to decide the policy rate and a GST council to administer the new unified Goods and Services tax regime that will come into effect later this year. India is clearly moving to a new and progressive framework for macroeconomic policy.