What is the Fiscal Consolidation Roadmap?

The Union Budget 2016 has got presented in the Parliament and most of the economic analysts have congratulated Jaitley on sticking to the fiscal consolidation roadmap.

Fiscal consolidation is an attempt made by the Government to reduce  the fiscal deficit in the country. Read about fiscal deficit from this article: Fiscal Deficit

Negative effects of fiscal deficit

• Fiscal deficit crowds out private investment/ expenditure. Huge Government borrowings to finance the fiscal deficit (excessive expenditure over revenue) leads to an increase in interest rates. This increase in interest rates acts as an impediment to private borrowings. Hence, the crowding out of investments.
• Huge spending by the Government can cause inflation in the economy.
• Fiscal deficit leads to reduced room for monetary easing by the RBI.

Roadmap for fiscal consolidation

In August 2012, the Finance Minister constituted a committee under Dr. Vijay Kelkar to outline the map for fiscal consolidation. The committee laid out a roadmap to reduce the fiscal deficit within 5 years.

As per the roadmap, deficit had to be brought down to:

4.8% of GDP in the fiscal year 2013-14

4.2% in the year 2014-15

3.6% in the year 2015-16

and finally to 3% in the year 2016-17

In the last year’s budget (2015-16), Arun Jaitley had delayed the roadmap by a year. They envisaged to reduce the fiscal deficit to 3% by the fiscal year 2017-18 (and not by the year 2016-17)

The fiscal deficit target for the year 2015-16 was pegged at 3.9% instead of 3.6%. It was achieved by the Government.

For the current fiscal year 2016-17, the fiscal deficit target has been fixed at 3.5 % of GDP and it will be reduced to 3% in 2017-18. Thus, Arun Jaitley did not deviate from the fiscal consolidation path laid by him in the last budget.

Notes:

The Parliament passed the Fiscal Responsibility and Budget Management (FRBM) Act in the year 2003. This Act specified that fiscal deficit had to be reduced to 3% by 2008-09. We were on the right path to achieve this target when the financial crisis happened. This Act had to be put on hold.  Now, we want to reduce fiscal deficit to 3% by the year 2017-18.