The government has been flouting fiscal deficit target every year since FRBM Act 2003 was enacted. We could not achieve the target in 2005-08 due to slowdown in the economy (as a result of global slowdown). The targets were further pushed for two more years. Again, we failed in achieving the same. The successive government has focussed on spending more than revenue receipts. That is why fail to achieve the targets everytime. And it is also indispensable. Because unless we achieve the growth, we once enjoyed, at a level of 8-9%, we won't stop spending. Revenues always take hit, because we have not been able to mobilise direct tax enough. We have done good in indirect tax front. But direct tax collection always take a hit.
In above circumstances, there always arise a question: what is the need to adhere to such fiscal consolidation path as mandated by FRBM Act? This also gives the feeling of guilt, that we were not able to achieve it this year. That we need to cut down spending next year by this amount. Why we make false promised every time knowing the fact that, the economy needs spending for the coming years. Do we want to hold a flag for the international arena, that look, we always try to stick to our targets? But we slip by certain percentage, owing to reasons, we take pride in. There is another important question to ask, does the investors feel attracted to invest with such fiscal slippage? Or, it does not matter them, knowing that interest rates will be attractive, if fiscal slippage is not beyond a certain limit.
So, from investor point of view, should the interest rates be a benchmark for the economy, or fiscal deficit targets be the benchmark, which we never achieve?
The problems are not as complex, as we have made it, by fixing the fiscal deficit targets. When we fix such targets, we also tie our hands in giving loans to the state governments. The state governments, in turn tie their own hands in spending for health, education and other innovative schemes such as Bhavantar Bhugtan Yojana (which is flagship scheme of the MP government to give the farmers the differnece in the amount announced as MSP and market price, since this is diff, the state governments can afford, gives little rise to inflation, not burdened with entire MSP amount. If the states coffer had been full, then such schemes hold little importance).
Another problem with fixing target is that, the govenrment try to raise money with extra budgetary resources, from the market , from the international institutions, and so on. This exerts pressure on the interest rates, with which the goverment need to repay back the principal amount. With such pressure, the focus on spending on social schemes, developmental schemes such as industrial institutions etc, dwindles.
So, we should aim at following things in the economy for an all round growth without worrying about fiscal deficit targets:
1. Aiming at maximising the revenue receipts alone, and not worry about on the expenditure front; because the latter is indispensable. The former has to be maximised by innovative startegies, which is sustainable, like plugging tax evasion, tax avoidance, round tripping of money. One strategy that can be deployed is swapping money between two nations. US to give India certain dollars and India to give back that amount without any interest. This will infuse liquidity and make money available for spending.
2. Heavy expenditure to be carried on infrastructure such as roads, bridges, railways, power, inland waterways, dams, power plants, coal excavation and downstream processes. The money for these developments will come from tax revenues as stated above, money swapping (above ) and further borrowing (where interest will be paid). This will increase our budgetary deficit. But again, it will be managable once we start reaping the benefit.
3.Plug expenditure on environmental projects that are stalled such as wetlands conservation projects due to regulation issues. Complete the stalled infrastructure projects.
4.Excessive use of Green bonds, Municipal bonds etc for resource mobilisation
5. Funds that do not get used for 3 successive years, reduce the amount to half.