As the quarterly progress report on Fiscal Responsibility and Budget Management (FRBM) Act is readied for presentation in Parliament on Friday, the finance ministry has advised Planning Commission that shifting the targets for fiscal and revenue deficit reduction beyond 08-09 is not possible.
In a letter to the commission, the ministry said any changes in these targets, specified under the FRBM Act, would create macroeconomic imbalances and will have repercussions on inflation and interest rates.As per the Act, the government is committed to bring down fiscal deficit to 3% of the GDP and revenue deficit to 0% by 08-09.
But the commission has favoured extending these targets by at least two years, to meet additional resources required for public investments. It said the compression of deficits would limit the availability of finance for public investment, expected to touch 34% of the GDP. This has been spelt out in the draft approach paper to the 11th Five-Year Plan, put up on the commission website.
The ministry has, however, termed the move to change the FRBM goalposts risky at this juncture, because of the increased off-budget borrowings by the Centre, like oil bonds (Rs 28,000 crore) and FCI bonds (Rs 16,000 crore).
A relaxation of the FRBM targets will seriously undermine the credibility of the government, as it would also imply a shifting of the responsibility to the future governments after (the general) election, the ministry has told the commission.
Sources in the Planning Commission said they are still hopeful that the finalised approach paper will commit the government towards an extension of the FRBM targets.
This will step up public investment in social sectors which is expected to rise to 1% of GDP by 07-08 and 2.5% of the GDP by 11-12.
The ministrys letter says this additional expenditure should be worked out within the limits specified in the Act, as changing the goalpost to a cyclically adjusted deficit may not be a prudent approach. It would also seriously undermine credibility of the government and amount to changing of rules when the going gets tough.