What happened?
- The government has announced the constitution of a panel under Former Revenue Secretary and Rajya Sabha MP N.K. Singh to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
Considerations before the Panel
- It will consider the possibility of replacing absolute fiscal deficit targets with a target range that may be adjusted in line with the overall credit trends in the economy.
- The Committee is also tasked with examining the need and feasibility of aligning the fiscal expansion or contraction with credit contraction or expansion respectively in the economy.
What is a counter-cyclical policy?
- Procyclical and countercyclical are terms used to describe how an economic quantity is related to economic fluctuations.
- The terms are often used loosely to describe a government’s approach to spending and taxation. A ‘procyclical fiscal policy’ can be summarised simply as governments choosing to increase public spending and reduce taxes during an economic boom, but reduce spending and increase taxes during a recession.
- A ‘countercyclical’ fiscal policy refers to the opposite approach: reducing spending and raising taxes during a boom period, and increasing spending/cutting taxes during a recession.
Challenges before the economy
- The challenge for the committee would be not just to define a counter-cyclical policy but also to build it into law considering that few countries have such provisions in their fiscal legislation.
- The other potential danger lies in providing a wide range that could provide leeway to governments closer to re-election to abandon prudent fiscal practices.
- But the true test of compliance with a legislation like the FRBM is when the economy is gripped by a slowdown, and governments are tempted to spend to sustain jobs and growth.
Conclusion
- Considering some of the hard won gains over the last few years and India’s record on fiscal prudence, hopefully, the N.K. Singh Committee would work on a set of recommendations that would lead to a conducive fiscal environment, which would help foster growth.
