Finance ministry to set up Working Group to redraw fiscal consolidation path

Economy


The finance ministry will soon set up an internal working group to redraw the country’s fiscal consolidation road map following the sharp slippage caused by the Covid-19 pandemic. A new legislation based on this group’s recommendation may be introduced in the monsoon session of parliament, a senior government official told ET.

“An internal group may be set up to examine various issues… Various recommendations from expert committees are already available,” the official said, explaining why the finance ministry may opt for an internal group instead of setting up another committee.

The government has pegged the fiscal deficit for FY22 at 6.5% of GDP, which will be brought down to 4.5% by FY26. It’s seen at 9.5% of GDP in this fiscal year.

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The current Fiscal Responsibility & Budget Management (FRBM) Act mandates a fiscal deficit of 3% of GDP to be achieved by March 31, 2021.

The Finance Commission, which presented its report in November and was seized of the fiscal slippage, , has recommended bringing the fiscal deficit down to 4% of GDP by FY26 in the base case scenario but has also provided some flexibility. In the event of a strong recovery, the commission has suggested a target of 3.5% of GDP but if growth is weak, the fiscal deficit can go up to 4.5% of GDP to provide a counter-cyclical boost.

The group will examine the options of a range and a fixed target. The fiscal consolidation framework has so far targeted a fixed fiscal deficit of 3% of GDP, which has not yet been attained.

The Economic Survey for the current year presented before the February 1 budget called for a “more active, counter-cyclical fiscal policy” to enable growth during economic downturns.

“Any economy has oscillations — there are ups and downs. When fiscal policy is pro-cyclical, that actually exacerbates those troughs. When fiscal policy is counter cyclical, that mitigates those peaks and troughs,” chief economic advisor KV Subramanian told ET in an interview after the budget. “When the peaks and troughs are mitigated, macroeconomic uncertainty goes down, which is extremely important for investment to happen from the private sector.”



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