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

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

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?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS