"An effective implementation of fiscal discipline within a framework consistent with the FRBM's recommendation and supported by the set-up of a fiscal council would point to a lower debt burden over time and would support India's credit profile," Moody's Vice President William Foster said in statement.
The committee, headed by former Revenue Secretary N.K. Singh and whose report was made public on Wednesday, has recommended that the fiscal deficit should be brought down to 2.5 per cent of the gross domestic product (GDP) by the financial year 2023 in a phased manner.
It has also suggested a revenue deficit of 0.8 per cent and a combined Centre-state debt-to-GDP ratio ceiling of 60 per cent for fiscal 2022-23, which is the end point of its medium-term fiscal road map.
The panel suggested adopting the debt-to-GDP ratio as a new anchor of fiscal policy along with the deficit, and setting up of an autonomous fiscal council.
The main functions of the proposed fiscal council will be preparing multi-year fiscal forecasts, preparing fiscal sustainability analysis, providing independent assessment of the central government's fiscal performance and improving quality of data, the committee said.
"It is proposed that an independent Fiscal Council may be constituted as part of the new institutional framework to be made part of the new proposed Debt Management and Fiscal Responsibility Act ('Debt Act') to replace the FRBM Act," the report said.
It recommended that India should monitor its debt-to-GDP ratio and gradually bring it down to 60 per cent -- constituted by 40 per cent for the Centre as against the existing 49.4 per cent, and 20 per cent for the states as against the existing 21 per cent.
"Based on extensive internal and external consultations, cross-country experience, and several rounds of discussions and deliberations within the committee, the committee recommends a move to public debt to GDP ratio as a medium-term anchor for fiscal policy in India," it said.
Simultaneously, the committee also said that the revenue deficit should be 2.05 per cent of GDP in the current fiscal, declining to 1.8 per cent next year, and to 1.55 per cent in 2019-20. This should be brought down to 0.8 per cent in 2022-2023.
"India, with a public debt close to 70 per cent of GDP, currently stands out as among the most indebted countries amongst the relevant peer group of emerging markets," the report said.
"Finally, public debt exemplifies an important factor in the assessments of rating agencies."
In his dissent note to the report, Chief Economic Adviser (CEA) Arvind Subramanian described the fiscal deficit targets suggested by the committee as "arbitrary", adherence to which will aggravate "booms and busts" in the economy.
"The new architecture would be a corset on fiscal policy, resulting in extreme procyclicality -- aggravating booms and busts -- with adverse effects on the economy," Subramanian wrote.
He also expressed his reservations regarding multiple targets of stock (debt-GDP ratio), flow (fiscal deficit-GDP ratio) and composition (revenue deficit-GDP ratio).
"There is a problem, because multiple targets force policymakers to aim at too many, potentially inconsistent objectives and analytical frameworks, running the risks of overall fiscal policy being difficult to communicate for the government and comprehend for market participants," he said.
The CEA suggested that the focus should be on the primary deficit as the fiscal target, instead of the fiscal deficit.
India's fiscal deficit in the April-February period of the last fiscal ended March 31 touched Rs 6.06 lakh crore, or 113.4 per cent of Budget Estimates for 2016-17, as against 107.1 per cent of Budget in the same period of last year, government data showed last month.
The government had set the target of restricting the 2016-17 fiscal's deficit at 3.5 per cent of the GDP, or to Rs 5.34 lakh crore.
In a move to support higher government spending in this fiscal, Finance Minister Arun Jaitley has pegged the fiscal deficit target at 3.2 per cent of the country's GDP in his Budget 2017-18.
The figure is higher than the earlier targeted figure of 3 per cent of the GDP for 2017-18. The target for 2018-19 has been set at 3 per cent.
The FRBM Act, 2003, is designed to institutionalise financial discipline, reduce fiscal deficit, improve overall management of public funds by moving towards a balanced budget and strengthen fiscal prudence.
The Act's main purpose was to eliminate the revenue deficit of the country and bring down the fiscal deficit to a manageable 3 per cent of the GDP by March 2008, but this deadline got postponed due to the global financial crisis that unfolded late in 2007.
(This story has not been edited by Social News XYZ staff and is auto-generated from a syndicated feed.)
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