The Confederation of Indian Industry (CII) today unveiled a new assessment of Fiscal Deficit that better measures the Government’s revenue and expenditure balance. The composite Fiscal Performance Index (FPI) developed by CII is an innovative tool using multiple indicators to examine quality of Budgets at the Central and State levels.
“It is important to study diverse sources of revenue and expenditure heads to truly assess the fiscal situation of a nation. A single criterion such as the ‘fiscal deficit to GDP ratio’ does not tell us anything about the quality of the Budget. Hence, the Government should use multiple indicators to measure the quality of Budgets at the Central and the State levels rather than a single indicator,” said Mr Vikram Kirloskar, President, CII.
According to CII, such a comprehensive measure of fiscal conditions can better help target Government’s social and capital expenditures keeping in mind fiscal stability. It would also contribute to strategy formulation to manage economic development with macroeconomic prudence.
As per the CII FPI, expenditure on infrastructure, education, healthcare and other social sectors can be considered beneficial for economic growth. At the same time, tax revenues are sustainable sources of revenues for the Government as compared to one-time income sources.
“In view of the results obtained from our analysis, we recommend that the Fiscal Responsibility and Budget Management (FRBM) Act which sets targets for the governments to reduce fiscal deficits should not solely focus on one component. Instead, a holistic performance of all entities viewed from all angles of expenditure quality, revenue receipts quality, and fiscal prudence should be taken into consideration,” Mr Kirloskar commented.
The proposed composite index of fiscal performance evolved by CII comprises of six components for holistic assessment of the quality of Government Budgets. These include:
I. Quality of revenue expenditure: measured by the share of revenue expenditure other than interest payments, subsidies, pensions and defence in GDP,
II. Quality of capital expenditure: measured by share of capital expenditure (other than defence) in GDP,
III. Quality of revenue: ratio of net tax revenue to GDP (own tax revenue in case of States),
IV. Degree of fiscal prudence I: fiscal deficit to GDP,
V. Degree of fiscal prudence II: revenue deficit to GDP and
VI. Debt index: Change in debt and guarantees to GDP
The index is constructed using UNDP’s Human Development Index methodology. By construction, a higher value of index is indicative of an improved performance and vice versa.
CII has constructed the FPI for the period 2004-05 to 2017-18 for both the Central and State budgets (for States, the end year is 2016-17).
At the Centre, the CII analysis shows that fiscal consolidation was highest in 2007-08 while 2009-10 emerged as the worst year. After staging a recovery in 2010-11, FPI deteriorated from 2011-12 onwards till 2014-15 despite the fiscal deficit index posting an improvement. This was mainly due to poor performance of the tax revenue and expenditure quality indices (both revenue and capital).
The index started to improve from 2015-16 onwards and reached a high in 2016-17, before dipping again in 2017-18. The dip in 2017-18 was underpinned by a sharp moderation in capital expenditure despite recording an improvement in the fiscal deficit index.
At the State level, the CII calculations show that the States which are presumed to be good in fiscal health (based on fiscal deficit to GDP ratio) and fall in the high-income category such as Maharashtra, Gujarat, Haryana, etc. are not necessarily doing well on the composite fiscal performance index front.
This clearly is indicative of the inadequacy of one single criterion such as the fiscal deficit to GDP ratio in judging the overall quality of Budgets of the State governments. These States have performed poorly on the Expenditure Quality and Revenue Quality Index as compared to the other States.
On the other hand, among the low-income States, Madhya Pradesh, Andhra Pradesh, Uttar Pradesh and Bihar have shown a consistently good performance on the FPI over the years mainly due to good performance in Expenditure Quality Indices (Revenue and Capital). However, the performance of these States on the Fiscal Deficit Index has remained below average.
5 June 2019