Fiscal policy: Don’t let rings be run around the budget deficit
It’s the season of clear targets, quick wins and instant applause, as the Olympics of 2024 kick off in Paris, a city aflutter with flags bearing their famous ‘rings of unity.’ Among other virtues, the Olympic Games offer us a contrast with economic frames, which have complex targets, slow wins and patchy applause. So much so that our heads can begin to spin if rings get run around what’s good for the economy, as if the data overload of every budget is not heavy enough.
As it happens, this week’s budget has left us with a macro head-spinner: Can India’s government use a debt cap as the operative constraint on the fiscal space at its disposal? In other words, can the yawning gap between its outflows and inflows of money, its fiscal deficit (or ‘fisc’), stay enlarged so long as its debt pile keeps reducing? After declaring 4.9% of GDP as this year’s fisc, with an aim of going below 4.5% in 2025-26, finance minister Nirmala Sitharaman said that from 2026-27 onwards, “Our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP." To be sure, the latest budget is designed to tick that box. It projects the Centre’s debt at 56.8% of GDP this year, down from last year’s 58.1%.
Does this explain why the FM did not offer an extended glide path for the fisc? For clues, look up the Centre’s stance on deviations from goals set by India’s Fiscal Responsibility and Budget Management law. In keeping with a routine of the past half decade, its latest FRBM Statement speaks of the pandemic forcing the fisc to peak (and other demands on central coffers), but what grabs attention is this: “An active and nimble fiscal policy strategy is a prerequisite for
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