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Panel to look into FRBM Act, work on fiscal policy framework:CEA

The government on Tuesday appointed a five member Fiscal Responsibility and Budget Management (FRBM) panel which will look into the FRBM Act. The panel will be headed by NK Singh.

Alongwith Singh, CEA Arvind Subramanian, RBI deputy governor Urjit Patel,
Sumit Bose and Rathin Roy will a part of the panel.

The FRBM Act deals deals with matters of fiscal discipline, such as spending and deficit, alongwith management of macro-economic factors and public funds.

The panel will have to submit its recommendations on the Act by October 31. 

Speaking to CNBC-TV18, CEA Arvind Subramanian said that the main job of the panel is to review how FRBM Act has worked out in last few years and if any changes are needed in it.

It is high time to update the framework for fiscal policy, he added.

The FRBM panel, which was announced by Finance Minister Arun Jaitley in his Budget speech, will look into factors that influence the country’s fiscal targets.

The committee will be looking into various factors determining FRBM targets and will also examine need and feasibility of having a fiscal deficit range.

Below is the transcript of Arvind Subramanian’s interview with CNBC-TV18’s Shereen Bhan.

Q: It was in your economic survey ahead of the Budget that you talked about reviewing as well as possibly resetting the Fiscal Responsibility and Budget Management (FRBM) framework. What will the panel hope to achieve at the end of this exercise you have until October 31? The terms of reference have now been announced by the government, the Finance Minister explained the broad areas that this committee will look at in his Budget. Can you explain to us what the process will be and what the panel hopes to achieve at the end of this?

A: What we aim to achieve is expressed clearly in the terms of reference that we will review how the act has worked over the last many years. We will see if and whether it needs to be changed and if so in what direction. In the economic survey as we said there has been a lot of international learning with fiscal rules and so on and also the Indian situation has changed. It is really updating the FRBM to become consistent with the India of today and the India of next 10-15 years.

Q: Speaking of the India of today and I know that this was part of the pre Budget consultation process – this big debate on whether we ought to stick to a fiscal deficit number or we ought to have a fiscal deficit range because it would provide the government more flexibility. There was talk about the possibility of an additional stimulus required to give the economy a further boost this time around. However the government decided to stick with the fiscal deficit target that was already announced. Do you believe that there is need to give the government greater room, a higher degree of flexibility and so it would be more prudent to work with fiscal deficit range as opposed to a number?

A: If I were to answer that, there would be no need for the FRBM Committee.

Q: It is part of the discussion and it is part of the terms of reference, so I am starting a healthy debate here.

A: We are going to have discussion, we are going to consult quietly. There are so many things that are going to go into determining what the framework for thinking about fiscal policy should be going forward. I think that is what it is, examine what has happened in the past and update that framework for fiscal policy. Whether it is more, less all these are things that the committee will decide, deliberate and then come up with answers and possible recommendations.

Q: This business of FRBM Act and reviewing the performance of the FRBM Act over the last 12 years and the need to update it not just keeping in mind India\’s current economic scenario but what’s happening around the globe as well. If I were to ask you about the determining factors that you could perhaps look at and the need for updation given what is happening in the global context, what would those factors be?

A: All kinds of things. The world has changed so much over the last 15 years. Internationally we were in the era of the great moderation, low inflation, growth as booming and then we had the financial crisis. Our own economy has undergone a lot of change over the last few years.

So, we need to therefore look into what kind of targets do we need – debt target, deficit target, cyclically adjusted, non- cyclically adjusted, rules, institutions, just a whole bunch of new things we need to review. It is high time to just update that fiscal framework.

Q: A quick question as far as the economy is concerned because we are getting confusing signals at this point in time on the strength of the recovery. If you look sales numbers coming in from the auto sector or even if you look at corporate earnings, there is an improvement but then if you look at the data that is coming in on the macro front, whether it’s Index of Industrial Production (IIP) or manufacturing it seems to suggest that we aren’t really on the cusp of a recovery at this point in time if you go by the latest print. How would you sum things up on the macro front?

A: We are looking at all the data as you said there are lots of positive signals and there also signals that are challenging, so we need to pass it out, look at it more carefully and for the moment we still have the economic survey projection of 7-7.75 percent that’s our projection.

As the data come in we will see what the outlook is going to be, so it’s too early to say what has change significantly from when we wrote the economic survey.

Q: Do you believe that the move that we are seeing in crude prices back to about USD 50 is going to be a dampener for us?

A: I think as long as it’s within the range, we can live with slightly higher level of oil prices as long as it doesn’t breach USD 70-80 and go back to those levels, we should be able to manage.

Q: When do we see the first meeting of the Fiscal Responsibility and Budget Management (FRBM) panel?

A: All the members need to meet and you can monitor the progress of that as we go along.