Fiscal prudence not by rigid targets

Fiscal prudence not by rigid targets

The committee headed by N K Singh to review India’s fiscal management has produced an illuminating report. However, it is difficult to concur with its specific targets for period from this fiscal to 2022-23.
Easiest to disagree with are the targets for the revenue deficit. The revenue deficit is not really the gap between current receipts and consumption expenditure.
Spending on healthcare and education is treated as revenue expenditure but represents vital investment in human resources, without nurturing which no economy can compete effectively in the emerging, knowledge-intensive world.
Only if it is possible to take such items of expenditure out of the revenue account would it make sense to set a specific target for reducing the revenue deficit. General government debt, of both the Centre and the states, is to be brought down to 60% of GDP by 2022-23.
This would appear to be quite arbitrary. The reality is that the discussions of the committee take place in a framework of taxation prior to the implementation of the goods and services tax (GST).
If the tax is rolled out as it has been envisaged, the result would be little short of a revolution. India is an outlier in its ability to administer a tax system at a particular level of income.
The key differentiator is extensive telecommunications and the ability to deploy information technology for tax administration. Hitherto, this capability has been minimally tapped. It would be utilised fully, for implementing GST.
The result would be to derive precise estimates about value added in the economy, leading to efficient collection of direct and indirect taxes. A bounty of tax revenue would make a serious dent on debt and deficit requirements. Credibility of macroeconomic management is what counts, not any given set of fiscal targets.
If a credible fiscal council elucidates the evolving contours of macroeconomic health, and the rationale for fiscal expansion or contraction, that is likely to inspire confidence among investors, domestic and foreign, rather than meeting or missing some preset numerical targets.