ECONOMIC SURVEY: Fiscal Framework: The World is Changing, Should India Change Too?

ECONOMIC SURVEY 2017 CHAPTERWISE ANALYSIS

Fiscal Framework: The World is Changing, Should India Change Too?

I want the cultures of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any.
– Mahatma Gandhi

Advanced countries have embraced fiscal activism, giving a greater role to counter-cyclical policies and attaching less weight to curbing the debt stock. But India’s experience has taught the opposite lessons. It has reaffirmed the need for rules to contain activism, so as to rein in excessive spending during booms and inordinate deficits during downturns, a pattern that contributed to both recent episodes of severe macro-economic instability (1991 and 2013). India’s experience has also highlighted the risk of relying on rapid growth rather than steady primary balance adjustment to reduce debt, a strategy that has failed to place the debt-GDP ratio firmly on a downward path.

India’s fiscal gradually falling since the new govt came to power.

PARADIGM SHIFT IN FISCAL POLICY:

The new view of fiscal policy shifts the emphasis from stocks to flows, arguing for greater activism in flows (deficits) and minimizing concerns about the sustainability of the stocks (debt).

CASE FOR ACTIVIST FISCAL POLICY IN ADVANCED ECONOMIES:

The case for activist fiscal policy in the advanced economies (AEs) rests ultimately on two pillars: weak economic activity and the inability to address this problem through monetary policy.

WHAT MAKES INDIA’S CASE DIFFERENT?

India’s situation differs from that of the AEs in some important ways. To begin with, Indian growth rates are substantially higher, while inflation rates are also substantially greater. As a result, monetary policy is nowhere close to the zero lower bound, reducing the need for fiscal activism. And because inflation is already relatively high, counter-cyclical policy has to be much more sensitive to triggering higher inflation.

Perhaps a more important argument against activist counter-cyclical policy is India’s own recent experience. The two episodes of Indian macro vulnerability in the last 35 years—1991 and 2013—were associated with, even preceded by, large increases in fiscal deficits.

INDIA’S STOCK A.K.A DEBT PROBLEM

India also appears to have a stock problem, in that its debt-to-GDP ratio is higher than many other emerging markets. However, India is very different from many other emerging markets, especially those in Latin America (and Russia) which have defaulted on their domestic obligations. India shares with AEs the experience of not having defaulted on its domestic debt either de jure or de facto. In the recent past, India’s highest level of debt has been 83 percent of GDP and it has made sure that its debt service obligations have been conscientiously met.

PRIMARY DEFICIT: INDIA’S VULNERABILITY

Vulnerability is the country’s primary deficit, that is the shortfall between its receipts and its non-interest expenditures.
Put simply, India’s government (centre and states combined) is not collecting enough revenue to cover its running costs, let alone the interest on its debt obligations.

As a result of running a primary deficit, the government is dependent on growth and favourable interest rates to contain the debt ratio. In fact, in the aftermath of the GFC as growth slowed and disinflation occurred, debt levels started to rise again.

CONCLUSION

India normally undertakes policy-related fiscal adjustment only gradually. Aside from crisis periods, the fiscal position has only improved sustainedly when it has benefitted from windfalls, arising from exceptional growth (as in the mid- 2000s) or major declines in oil prices.

India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. In short, it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.

Even as these basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modified to reflect the India of today, and even more importantly the India of tomorrow.

To check out MCQs based on Economic Survey 2017, use the following Links:

  1. MCQs based on Economic Survey 2017 (Part I)
  2. MCQs based on Economic Survey 2017 – (Part II)

To check out Multiple Choice Questions (MCQs) on Union Budget, click on the following links:

  1. MCQs BASED ON UNION BUDGET- CONCEPTUAL FRAMEWORK
  2. MCQs BASED ON UNION BUDGET 2017-18 – BUDGET TRENDS & INSIGHTS
  3. MCQs BASED ON UNION BUDGET 2017-18 – ABBREVIATIONS & JAGRONS
  4. MCQs BASED ON UNION BUDGET 2017-18 – BUDGETARY REFORMS, CHALLENGES & ROAD AHEAD
  5. MCQs BASED ON UNION BUDGET 2017-18 – BROAD THEMES

Do make sure to revise the Basics of Union Budget & Key Features of Union Budget 2017. If you have not already done, you can follow these links:

  1. Budget 2017 at a Glance
  2. Highlights of Union Budget 2017
  3. UNION BUDGET

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