Question 1 · 10 marks · 195 words written
Opening · a restatement
The recent shift from fiscal deficit target of 5% as the fiscal anchor towards Debt-to-GDP ratio highlights a reformation shift in balancing the budgetary deficit.
Body · points
Rationale behind this shift:
To align with the 'international standards' to debt measurements like the IMF & World Bank.
This shift helps to overcome the drawbacks of 'escape clause' of the fiscal deficit target under FRBM act.
Government spending during the 'black swan' event can be justified if debt-to-GDP is measured instead of maintaining an fiscal deficit anchor.
Gives 'fiscal space' to government without breaching the targets. Thus helps to improve the capex ratio.
Debt to GDP ratio will help in measuring the changes between the two and 'fiscal health' of the economy in better parameters.
'Holistic comparison' with other countries can help to analyse our stand in the global markets.
→ However, few concerns raised
→ Breaching the FRBM limit of fiscal deficit can cause 'inflationary pressure' on the economy
→ Increase in the 'off-budget' borrowings can result in 'crowding out effect' to the private sector.
Close · a summary
Thus, though the shift is reformative but must be balanced to ensure healthy fiscal targets are met.