Budget 2019: India and Fiscal Deficit

Meaning of fiscal deficit in India's context

India set out a fiscal road map for itself and came up with the Fiscal Responsibility and Budget Management (FRBM) Act way back in 2003. It was enacted with a view to provide a legislative framework for reduction of fiscal deficit. The objective was to reduce the fiscal deficit to 3% of GDP by 2008-09 with annual reduction of 0.3% of GDP per year. It never happened and in February 2009, the govt decided to relax the targeted fiscal parameters. Thereafter, it kept on relaxing it year after year. Last year, it amended the FRBM rules and extended the timeline of meeting the target of 3% to 2020-21.

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Is an obsession to meet fiscal deficit deficit target justified?

With India's new indirect tax regime bound to have some teething problems in the initial years and infrastructure spending growing at a faster clip, some economists allow the slippage by a percentage point or two. However, rating agencies and International Monetary Fund recommend an strict adherence. Arvind Subramanian, noted economist and former Chief Economic Advisor in the Modi government had recently said that India should be a little less obsessed with the fiscal deficit target and concentrate more on quality of spending.

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