Focus on medium-term macro-budgetary frameworks

The GDP figure for the second quarter of FY22, which grew 8.4%, sparked discussions on growth prospects for the current year, but also for fiscal 23. It There was also a discussion about the whole recovery process in terms of whether it is generalized, V-shaped, K-shaped, etc. Although recent data as well as some leading indicators suggest a decent recovery, there were apprehensions regarding the sustainability of these numbers. This is all the more true when the Covid-19 and its new variants are still ravaging the global economy. While the volatility of macroeconomic indicators is here to stay with changing pandemic conditions as well as global economic developments, for India there is a need to focus on medium term growth and development prospects. Indeed, the next Union budget could be an opportunity to focus on the medium-term prospects both in terms of growth and emerging development issues.

But what are the growth and development challenges in the medium term? Some of these issues are potential GDP growth, achieving a US $ 5 trillion economy, rising public debt, rising unemployment and inequality, achieving the Sustainable Development Goals (SDGs) ), rising inflationary pressures, among others. Although these issues are interrelated, there is an urgent need to integrate and discuss within the framework of the development of current public policies. Now that the Union budget for the year 23 will soon be presented, it may be possible to resolve some of these problems.

What needs to be done? In terms of potential growth, it seems that it has waned even before the pandemic hit the world and the main reason, in our opinion, is this. The dilution of the medium-term budgetary framework, different from the FRBM law of 2003, is a political misstep that could have lowered potential GDP. While the FRBM law of 2003 proposes targets on the budget deficit, the revenue deficit as well as on the public debt, the amended law of 2018 drops the revenue deficit as a target while retaining the other two targets. As we have undertaken studies for the last three central finance committees and in particular on macro-budgetary frameworks, we can confidently suggest that the three objectives of the 2003 law are internally consistent and at the same time ensure decent growth and sustainable GDP. And in our study for the 15th Finance Committee, we clearly showed that lowering the revenue deficit target could lower the potential growth rate by 250 to 300 basis points, on average, for the period of the 15th. FC. The economic logic here is that the original FRBM law of 2003 will ensure the shift in spending from public consumption to public investment while the amendment law of 2018 will ensure the exact opposite, thus reducing growth prospects. Although the 15th FC recommended the three targets although a little more flexible than the original law, it was only “indicative” and does not seem to bind the government. On a positive note, the government in Budget FY22 has indeed attempted to shift the focus of fiscal policy towards public investment and attempted to partially repair the damage caused by the 2018 Amendment Law. We now look forward to it. the next budget as well as its framework document on medium-term expenditure which contains the proposed roadmap for fiscal consolidation. In a way, as the study cited above has empirically shown, the return to the 2003 law not only helps to revive potential growth, but also to achieve savings of at least $ 5,000 billion over the course of over the next five years, if not by 2024-25, as planned. by the government. If not, as the three goals plus the growth goals are internally consistent, we might be faced with a situation in which potential growth declines while public debt might climb to a level well above l. 40% target (for the Center) set by the FRBM review. Committee.

On the SDG front, while there are many initiatives from both the Center and many state governments, which are indeed very welcoming, it gives us the impression, at least on the surface, that the response to the SDGs are just simple estimates of indices. Various indices and rankings are carried out at both sub-national and sub-state level. However, the crucial aspect of allocating more resources to various sectors of the SDGs as well as focusing on improving the efficiency of such public spending appears to have fallen behind. It is also important to underline that since the achievement of the SDGs will have a significant impact on improving the growth potential, through productivity gains, and at the same time will put more pressure on public finances, it is necessary to imperative to have a medium-term macro-budgetary framework (budgets and FRBM roadmaps) in line with the SDGs. Although we saw no reference to the SDGs in the 2017 FRBM Review Committee report, the 15th FC tried to respond in part, although it is not clear whether the suggested FRBM roadmap. endogenizes the resource requirements of the SDGs and their impact on growth. and government revenues. NITI Aayog and state-level planning councils or similar agencies should ensure such assessments to develop effective public policies for medium-term growth and development.

On the inflation front, if we broadly agree with the RBI’s assessment of inflation expectations, in the medium term, the international transmission of inflation and its impact on global growth could pose a serious risk. on growth expectations in India. One way to remedy this is to tighten monetary policy, which could stem the nascent recovery in demand. But for the recovery to be more sustainable, it is necessary to focus more on supply issues. The government has already taken various initiatives under the Aatmanirbhar Bharat and with the NIP as well as the NMP in place, India could overcome the constraints on the supply side as soon as possible. Added to this is the general drop in import tariffs, which should ease the supply-demand imbalance and help ease inflationary pressures. Many of us have written against the introduction of import duties on various products. We hope that we will not see the document titled “Customs notifications” as part of the next budget. Such documents clearly go against the average growth targets. We are optimistic that the next budget will continue the good initiatives introduced in last year’s budget as well as some of the initiatives taken last year and return the medium-term focus to growth as well as human development.

(NR Bhanumurthy is Vice Chancellor, Dr BR Ambedkar School of Economics, Bengaluru. Opinions are purely personal)

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