Economic Survey 2014: Fresh thinking on fiscal policy framework required

NEW DELHI: Given that the government is facing a financial crunch, the Economic Survey for 2013-14 has emphasised on the need for 'fresh thinking' on a responsible fiscal policy framework. "The fiscal situation of the central government is worse than it appears, given the acceleration of inflation from 2006 to 2014," the survey said.

"These inflation shocks effectively reduced the value of outstanding debt. This has harmed the interests of households but has reduced the debt burden of the government. These inflation shocks are unlikely to recur in the future," the survey said.

The survey goes on to stress on the need for a new FRBM Act with teeth. "This warrants a fresh thinking on a responsible fiscal policy framework. This should feed into a new FRBM Act. The modified Act needs to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored," the survey said.

Sating that inflation has eased out, but is still above comfort level, the survey emphasised the role of monetary policy for controlling price rise. "Monetary policy is essential for controlling inflation in long run," the survey said.

"Moderation of inflation will help ease monetary stance. Inflation limits scope for the RBI to cut rates," the survey stressed. "We need formal monetary policy rules for targeting CPI inflation," the survey added.

The survey projected the GDP growth at 5.4-5.9% for the current financial year. " Economy can look forward to better growth prospects in FY15," the survey said.

Stressing on the need for fiscal consolidation, the survey said that subsidy reforms are essential to keep the fiscal house in order. "Raising the tax-GDP ratio is essential for fiscal consolidation," the survey added.