FRBM: Yet another deferral? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

FRBM: Yet another deferral?

Jan 5, 2007

Soft implementation. This is the term that is being oft adapted these days whenever any policy or regulation compliance seems to be causing discomfort to those concerned or implementing the same on a full-fledged basis by the said deadline seems to be a remote possibility. The same holds true in the case of implementation of CAS, VAT, Basel II norms and now the much-speculated Fiscal Responsibility and Budgetary Management (FRBM) Act.FRBM - Target vs. reality
Targets: Reduce gross fiscal deficit (GFD) to 3% of GDP by FY08. Eliminate revenue deficit by FY09.

The FY07 budget had targeted fiscal deficit to be 3.8% of GDP (reduction by 0.3%) and revenue deficit of 2.1% of GDP (reduction by 0.5%). With the same unlikely to be met in the current fiscal, the revenue deficit reduction target for the next fiscal budget, therefore, needs to be increased to at least 0.8% of GDP from the original 0.5%, as per the <>RBI. This is with an eye on eliminating the revenue deficit by FY09, as targeted. Similarly, the budget would target reducing fiscal deficit by a quantum that is 50% or more than the original FRBM target of 0.3% for FY07, so that the goal of cutting this deficit to 3% of GDP by FY08 is met.

While the revenue augmenting fiscal policy for FY05 led to a reduction in revenue and fiscal deficits by more than twice the stipulated minimum thresholds under the FRBM Act, the callousness in the FRBM path in FY06 resulted in a slowdown in the progress towards fiscal consolidation. Both revenue deficit and gross fiscal deficit, relative to GDP, slipped in FY06 over their levels in FY05. It is also surprising to note that the deficit financing was done not only through internal but also external borrowings at a time when interest rates were hardening up globally. With the resumption of progress in approaching FRBM targets in FY07, reduction in wider deficits will have to be budgeted to fulfill the minimum annual stipulations. Consequently, larger deficit reductions in FY08 and FY09 will be required to meet the FRBM targets.

Means of damage control
Given that revenue expenditure has remained broadly stable in the last decade and a half, and non-tax receipts continue to be sluggish, the scope for deepening fiscal empowerment lies in improving tax revenue. This would require concerted efforts in substantially improving the tax/GDP ratio (approximately 19% in FY06) through further widening of the tax base and severe curtailment in tax exemptions. In this regard, the government has identified several exemptions, both in direct as well as indirect taxes, and the continuance of these exemptions is proposed to be reviewed after receiving public feedback and examining the rationale thereof. Removal or reduction of tax exemptions would not only lead to higher tax/GDP ratio but also enhance economic growth since tax exemptions and deductions distort allocative efficiency, undermine economic equity and increase compliance costs for the administrative authorities.

No wonder, the central bank also frowns upon the tax largesse lavished on the Special Economic Zones (SEZs) that could hold up the Centre's tax calculations when the general tariff level is being brought under the WTO dispensation.

The persistence of large fiscal deficits in the past has resulted in accumulation of outstanding debt that is substantially high by international standards. The interest burden of the government, therefore, continues to be high, constraining the government's ability to increase social sector and other productive outlays. Budgetary implications of issuance of oil bonds, outlays on the National Rural Employment Guarantee scheme and revenue implications of special economic zones also need to be factored in.

Necessity of adherence
Adhering to the FRBM targets in respect of fiscal deficit and revenue deficit is critical for macroeconomic, financial, external sector and budgetary sustainability. Furthermore, as use ofborrowed resources for meeting the current expenditure requirements has resulted in widening of asset-liability mismatches over the years, it is essential to eliminate revenue deficit and generate sufficient revenue surplus, which may be utilised for asset creation. Any slippage in achieving the FRBM targets could erode the gains achieved in the initial year of the FRBM. It could also generate a chain effect at the state levels to relax targets set out in their fiscal responsibility legislations. Finally, any deferral in the FRBM targets will have both national and international repercussions in terms of credibility.

Message for investors
While the Indian economy continues to exhibit strong fundamental resilience, the fiscal pressures have the potential for impacting stability and inflation expectations. Against this background, judgment on the part of investors is necessary with regard to the relative weights to be accorded to growth and price stability, recognising the lags in monetary policy. While domestic developments continue to dominate the economy, global factors tend to gain more attention now than before. The global outlook for growth is positive but downside risks in regard to inflation and re-pricing of risks in financial markets need to be recognised. Hence, it is necessary to strike a balance between evaluating the resilience of the Indian economy against global risks and giving a thumbs-up to growth prospects over the longer term.


Equitymaster requests your view! Post a comment on "FRBM: Yet another deferral?". Click here!

  

More Views on News

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS