7 MARCH 2016
Review the fiscal consolidation path
Passed almost three years after it was first introduced in Parliament, that too in a significantly watered down form, the Fiscal Responsibility and Budget Management Act has faced a rocky road in terms of implementation. Paused four times since its enactment in August 2003, including for a reset of the fiscal deficit target in 2008-09 following the global financial crisis, the FRBM Act has become a subject of animated debate. Central to this has been the question of whether the law has served the purposes for which it was envisaged. There is no denying that the Act has helped focus attention on the issues relating to fiscal consolidation — thanks to the mandatory medium-term and strategy statements that the government of the day is required to present annually before Parliament. But with regard to the larger objective of ensuring macro-economic stability, the record has been less than ideal. Both headline consumer price inflation and the debt-servicing costs for the Central government were, at different points in the post-FRBM era, at divergence with the performance of fiscal deficit, raising questions about the over-emphasis on a cast-in-stone target number. The nub of the issue is this: has the law allowed the government the elbow room needed to use all the fiscal tools at its command to ensure that the growth momentum is maintained, without either significantly fuelling inflation or curtailing spending on vital and socio-economically relevant development programmes? If it has not, this may be the time to review the Act, and if necessary, amend it significantly.
It is in this context that Finance Minister Arun Jaitley’s Budget proposal to have a committee review the implementation of the FRBM Act — even as he committed himself to sticking to the 3.5 per cent fiscal deficit target for the next financial year — is timely and germane. He has referred, for instance, to the possibility of adopting a target range rather than a specific number. The argument is that this would give the necessary policy space to deal with dynamic and volatile situations such as the one India currently faces — global economic and financial market uncertainty, a slowdown in China, and tepid private investment demand domestically. The suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion, as mentioned in the Budget speech, is worth exploring. While any attempt to jettison or even revisit the fiscal deficit targets is bound to draw sharp criticism from, among others, the global credit rating agencies, Mr. Jaitley has to look no further than the BRICS compatriot China. Chinese Premier Li Keqiang has just unveiled a budget deficit of 3 per cent of GDP, the highest level for that country since 1979 and a significant jump from last year’s 2.3 per cent target. But Mr. Jaitley will need to ensure that any resources freed up from a fiscal reset, when that happens, are spent imaginatively for an economic stimulus, and primarily on the creation of long-term public assets
Don’t let down the children
With worrying levels of stunting and lack of healthy weight among children revealed by the fourth round of the National Family Health Survey (NFHS) for 15 States, Budget 2016-17 was expected to provide some remedies. To begin with, it could have raised funding for the flagship nutrition programme, the Integrated Child Development Services. Instead, the Budget has dealt the ICDS a blow in the form of a 7 per cent cut over the revised estimate of expenditure for the previous year, of about Rs.15,500 crore. This follows the pattern of Budget 2015-16 which cut the outlay initially, but with provision of some supplementary grants later in the year. Such an approach to a welfare programme that is so crucial to the health of the next generation reflects a poor set of development priorities. It also defies economic reasoning, given that India has been growing steadily after liberalisation and has the wherewithal to substantially raise social sector expenditure annually. To their credit, several States have used the ICDS to improve health and welfare by providing good supplementary nutrition to children under six; the support of the Supreme Court has also helped in ensuring that commercial interests are unable to corner the funds, and there is provision for community oversight. The Ministry of Women and Child Development must focus on States such as Bihar and Madhya Pradesh with a large burden of stunted, wasted and underweight children as revealed by the latest NFHS data. Figures for all States together will give a full picture, including best practices.
Empirical evidence on the effectiveness of supplementary nutrition should prompt the Centre to enhance funding for the ICDS. Data from an earlier round of the NFHS show that when nutrition is available every day to children under two, there is a marked positive effect on their height, particularly for girls. Such early interventions have a life-long impact, in the form of higher productivity and earnings. Scholars have, however, found a tendency within the ICDS in some States to neglect the needs of children less than two years old. Only 6 per cent in this age group were getting adequate daily nutrition a decade ago. The more progressive States have corrected the bias, with striking results. There is a clear lesson here for others, and it is incumbent on the Central Ministry to monitor the implementation of the scheme. It can take the support of local communities and self-help groups, as provided for in the Supreme Court judgment of 2004, to ensure that wholesome cooked meals are provided and contractors are not engaged. More recently, the court wanted high standards of hygiene and nutrition maintained in ICDS centres. Finance Minister Arun Jaitley has missed the opportunity in the Budget to secure the future of India’s children, but he can still make amends. Raising the outlay, instituting a mechanism to heighten awareness among communities in less developed States and achieving full coverage are needed remedies.