US business and financial services firm Moody's Investors Service said on Friday India's credit profile would improve if it follows the fiscal discipline path and sets up a fiscal council as recommended by the FRBM panel.
The Fiscal Responsibility and Budget Management (FRBM) Committee in its report has suggested that the fiscal deficit, which is the difference between expenditure and receipts, should be brought down to 2.5 per cent by 2022-23 from 3.2 per cent in the current fiscal.
The recommendations offer a medium-term framework that focuses on fiscal consolidation, while targeting India's debt-to-GDP ratio as a fiscal anchor, Moody's Investors Service India sovereign analyst William Foster said.
"An effective implementation of fiscal discipline within a framework consistent with the FRBM's recommendation and supported by the set-up of a fiscal council would point to a lower debt burden over time and would support India's credit profile," Foster said.
Former Revenue Secretary NK Singh-headed panel has also recommended bringing down the Centre's debt-GDP ratio to 40 per cent by 2023 from 49 per cent at present.
The combined centre and state government debt to GDP ratio stands at 68.5 per cent. Rating agencies have often red flagged high debt-GDP ratio of India.
The Government borrows money from market to fund the fiscal deficit, thereby increasing public debt. Moody's has a 'Baa3' rating on India with a positive outlook.
Among other things, the FRBM committee wanted the existing FRBM Act 2003, to be replaced by a new Debt and Fiscal Responsibility Act and suggested setting up of a 'fiscal council' to provide forecast and analysis of fiscal deficit as well advise the finance ministry on escape clauses.
Over the last one and a half decades, India has been making serious efforts to reduce its fiscal deficit level. The 14th Finance Commission had set a stiff fiscal deficit reduction to 3 per cent of GDP under the Fiscal Responsibility and Budget Management Act (FRBM) by 2016-17. This target was extended by a year to 2017-18 by BJP led NDA government.
The message from the Reserve Bank of India (RBI) Governor Urjit Patel and the global rating agencies is very clear; follow the path of fiscal consolidation and push expenditure towards infrastructure and other productive purposes. A sustained and higher fiscal deficit is not good for the economy as it results in government's debt and also interest burden. Currently, 10 per cent of the budget expenditure is allocated for interest payments.
While debt is not a taboo for an emerging economy like India, but there has to be a disciplined approach to achieve fiscal consolidation. Over the years, the sustained increase in GDP has helped taking care of the higher interest payments. With the clouds of uncertainty looming large as US, China still to recover from the economic shocks and domestic economy also witnessing some pressure, the higher interest burden would eat away resources meant for productive uses. Secondly, India has been financing its deficit through domestic borrowing (over 95 per cent ), which leaves very little resources for the private sector.
RBI Governor Urjit Patel also warned that borrowing even more and pre-empting resources from future generations by government cannot be a short cut to long lasting higher growth. "Instead , structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front.
Investment in public transport, specifically railways and Urban MRTS can lead to reduced costs and productivity gains as also help us to lower oil import bill, and, as collateral benefit, improve air quality in our cities," Patel advised. It's no rocket science that benefits are much larger in following a fiscal consolidation path, but politics, too, plays its role in influencing a decision.
(With PTI inputs)