New Delhi: India will revise its framework for fiscal discipline later this year, seeking to rein in its high public debt and to lower its fiscal deficit, broadly based on the road map that a high-level panel headed by former revenue secretary N.K. Singh recommended in January.

A finance ministry official who spoke on condition of anonymity said the new framework for debt and fiscal deficit will feed into the annual budget for 2018-19.

Not only does it formalize fiscal responsibility, making the task of inflation management that much easier for the Reserve Bank of India, it is a confidence-building measure with respect to foreign investors and rating agencies.

A Debt and Fiscal Responsibility Act proposed by the Singh panel calls for making total debt instead of the fiscal deficit the metric for fiscal prudence. The panel favoured curtailing the central government’s debt at 38.7% of gross domestic product (GDP) by 2022-23, down from 49.4% in 2016-17.

This is a departure from the current Fiscal Responsibility and Budget Management (FRBM) Act that focuses mostly on limiting the fiscal deficit. The regime proposed by the panel also includes cutting the fiscal deficit to 2.5% of GDP over the same period, from 3.5% in 2016-17.

“Very soon we will take a decision on this (FRBM Act). We are very much committed to prudent fiscal management. We will follow calibrated measures to bring down fiscal deficit, which will also impact the level of public debt, which is still higher," said the official cited above.

However, before crystallizing the finer details of the new fiscal discipline regime, the finance ministry will wait for clarity on the impact of a new statutory commitment it took on this financial year—the obligation to fully compensate state governments for five years for any loss in revenue on account of the goods and services tax (GST) being implemented from 1 July.

“We are waiting to get a sense of revenue trends post-GST roll out," said another government official, who also asked not to be named. For GST compensation, the central government will assume that state revenue would otherwise have grown annually by 14%.

Another revenue uncertainty before the government is the health of the telecom industry, which has to make deferred payments for the spectrum that telcos purchased in earlier auctions. Telecom firms have requested the government to relax the repayment schedule and reduce the spectrum usage charges. The finance minister has targeted receipts of over Rs44,000 crore from the telecom industry in 2017-18 for various licences and permits.

At the same time, savings from subsidy reforms including the roll out of direct benefits transfer in liquefied petroleum gas (LPG) and the planned inclusion of fertilizers in the scheme is likely to improve the health of the exchequer.

Finance minister Arun Jaitley had, in his 2017-18 budget speech, taken note of the Singh panel’s recommendation of limiting the fiscal deficit to 3% of GDP for three years starting from 2017-18, but considering the need for making public investment amid global economic uncertainties, kept it at 3.2% for the current financial year. The FRBM Act also mandated a 3% limit. The finance minister said he will limit the deficit at 3% in 2018-19.

The Singh panel also called for a debt-to-GDP ratio of 60% for central and state governments together by 2023, consisting of 40% for the former and 20% for the latter, down from about 70% now.

D.K. Srivastava, chief policy advisor for EY, welcomed the initiative to recast the fiscal discipline framework through a new law but said it needs to be considered whether the exercise is to be based entirely on the Singh panel or with extra flexibility in charting out the debt-to-GDP and fiscal deficit adjustment paths.

Srivastava pointed out that the central government’s debt could be lowered to 40% of GDP even while running a fiscal deficit of 3% under the current law. “However, a lower debt limit for states (20% of GDP, to be achieved by 2022-23) while the central government can run a debt twice that size is not maintainable when both have to stick to a fiscal deficit target of 2.5%," he said, adding that the formula may need a modification.

The UDAY (debt takeover of power distribution firms by state governments) scheme and farm loan waivers announced by some states are likely to warrant more borrowing space for states, he said.

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