Ask not deficit gdp but deficit saving

Ask not deficit gdp but deficit saving

In 2003, the government passed the Fiscal Responsibility and Budget Management Act (FRBMA) to bring the central fiscal deficit down to 3 per cent of GDP by 2008 and turn a ballooning revenue deficit — what the administration spends on itself — into a surplus. Those targets are yet to be reached. While we support the idea of maintaining fiscal discipline, we believe that meeting a target set up by law is arbitrary and could be counterproductive.

The FRBMA was written when revenue spending was spinning out of control. Today, that is a lesser problem. Now, the government needs to boost public investment to revive growth. The private sector’s animal spirits are on vacation, and their speedy return depends on government action to revive investment. New Delhi has been trying, but is inhibited by the prospect of crossing fiscal deficit thresholds that would offend global rating agencies.

A fiscal deficit target of 3 per cent of GDP is fairly arbitrary. The economic significance of the fiscal deficit is that it represents a state claim on the private sector’s savings. How troublesome this is depends on two things: the size of savings relative to GDP, and private appetite to deploy its savings as an investment.

State pre-emption of savings by 3 per cent of GDP would crimp private investment far more in Britain, with a savings rate of 14 per cent, and in France, Italy and Spain with rates of savings around 21 per cent, than in China, where the 48 per cent of GDP is saved, or in India, where the savings rate is 31 per cent plus. Yet, a 3 per cent of GDP norm is used to measure fiscal prudence across the board. It is time India stopped yielding to this piece of rating agency stupidity. At a time when private sector investment is low, the state should expand its own investment by abandoning a target of 3 per cent of GDP for the fiscal deficit.

True, at near-70 per cent, India’s government debt to GDP ratio is high. But India has the potential to bring it down by expanding GDP at a fast clip. India should claim and use additional fiscal room to step up growth-inducing investment, but shun indulgences like debt waivers, on which state governments now seek to use up their fiscal capacity.