Directions: Read the passage carefully and answer the questions given below it. Certain words/phrases have been given in bold to help you locate them while answering some of the questions.
Sustained fast growth of the economy requires a stable macroeconomic framework, policies that stimulate growth, and institutions (including laws and rules) that support competitive self-sustaining, job-creating business and promote employment opportunities. Though India’s GDP growth rate has risen gradually to 7.6 per cent in 2015-16 (estimated), parts of the economy are being buffeted by global growth deceleration, capital market uncertainty and deflationary pressures. These have reduced nominal growth to 8.6 per cent and put pressure on the globalised corporate sector, reducing the nominal growth rates of their sales and profits. The rural economy has been weakened by two consecutive droughts, the first such dual droughts since the end-1990s. In this article, we review the budget to identify what, if anything, it proposes to do about these issues.
The 2016-17 budget implicitly recognises that a growth rate of 7.5 to 7.75 per cent does not require an expansion of government expenditure or wide tax incentives, by sticking to the fiscal deficit target of 3.5 per cent of the GDP for the next year. The decision to stick to fiscal targets enhances the credibility of the government, reduces the risk of contagion from world turmoil and sudden stops in capital flows and provides the basis for a reduction in policy interest rates by the RBI of up to 75 basis points. The proposed amendment of the RBI Act to create a monetary policy committee will formalise flexible inflation targeting, enhance the credibility of the RBI and allow better monetary-fiscal policy balance.
When the fiscal deficit target for 2015-16 was loosened to accommodate more infrastructure investment by government, the question in our minds was whether the government would be able to shift expenditure from consumption and subsidies to investment. The fact that the revenue deficit for 2015-16 is 0.3 percentage point below the revised target suggests that it has successfully achieved an improvement in the quality of government expenditures. As the revenue deficit is a rough measure of government dis-saving, this will help raise national savings and reduce dependence on foreign savings. The revenue deficit is projected to decline by only 0.2 per cent of the GDP in 2016-17 compared to the 0.4 per cent of the GDP reduction in the fiscal deficit. This is partly due to wage pressures arising from the implementation of the pay commission report. However, the budget could have done much more on reform of the fertiliser, food and kerosene subsidy. In the longer term, the proposed bill to provide statutory backing for Aadhaar for providing targeted benefits will greatly improve the efficiency of subsidy expenditure and reduce leakages and corruption. The adoption of the Kelkar Committee recommendations on public-private partnership would also help in completing stalled projects and reducing future regulatory uncertainty. Among the proposals in the budget are a public utility dispute resolution bill, guidelines for PPP renegotiations if the external environment changes unpredictably, and a credit rating system for infrastructure taking into account the special risks involved.
Q. What is/are the effect(s) of the decision to stick to fiscal targets?
(A) It enhances the credibility of the government.
(B) It prompts the RBI to raise the rate of interest.
(C) It reduces the negative effect of world turmoil and sudden stops in capital flows.