Presentation given by Yan Islam (Adjunct Professor, Griffith Asia Institute and former Chief, Employment and Labour Market Policies Branch, ILO, Geneva) to the Fiscal Responsibility and Budget Management Review Committee (FRBM Committee), 23 August, 2016, New Delhi, on behalf of ILO, New Delhi and Geneva.
This FRBM Committee was set up in May 2016 by the Indian government to review the country’s fiscal framework that has been shaped by the Fiscal Responsibility and Budget Management Act of 2003. The Committee is chaired by Mr. N.K Singh, former Revenue Secretary, former MP and a prominent figure in the ruling party under the Prime Ministership of Narendra Modi. The members of the Committee include Arvind Subramanium, current Chief Economic Adviser to the Indian government, and Urjit Patel who has very recently been appointed as Governor of the Reserve Bank of India. The Committee is expected to report to the government of India in October 2016 with a series of recommendations. One of the key issues that is currently under consideration is whether the revised fiscal framework should inject a greater degree of fiscal flexibility by allowing for a range of targets pertaining to the fiscal deficit as a proportion of GDP rather than a point estimate (3 per cent of GDP) as it currently exists.
Mr Singh wrote to the Director General of ILO, Geneva in June 2016 requesting that ILO share its international experiences on how middle income economies in different parts of the world have managed the trade-off between fiscal consolidation, growth and employment. The ILO, Geneva as well as the ILO, New Delhi in turn requested that I – given my expertise on the topic and experience of dealing with Ministry of Finance officials in developing countries – prepare a suitable presentation to the Chair of the Committee and an invited audience of experts. This presentation duly occurred on August 23, 2016 at the New Delhi premises of the Ministry of Finance.
I argued forcefully that the overwhelming weight of evidence is that fiscal consolidation imposes short run output losses and might impose long run risks in the form of higher inequality and higher long-term unemployment. For low and middle income economies, one should avoid an uncritical embrace of fiscal consolidation and adopt a sustainable resource mobilization strategy that enables governments to invest in health, education, infrastructure, social protection and active labour market policies. Fiscal flexibility that encourages both growth and stability is a highly desirable policy approach. I also urged a circumspect approach to structural reforms, especially in terms of labour market deregulation, that entails high short-run costs that may not be offset by ex-ante long-term gains.
The presentation was followed a by a wide ranging and robust discussion on the extent to which the lessons of international experience apply to India. The Chair thanked me and the ILO for the diligence and dedication that went into the preparation of the presentation and for engaging in a free and forthright discussion of fiscal policy from a growth and employment perspective.
The briefing note that was prepared for the presentation is available to download – Fiscal consolidation, growth and employment: international evidence and implications (in PDF).
Article by Yan Islam, Adjunct Professor, Griffith Asia Institute and former Chief, Employment and Labour Market Policies Branch, ILO, Geneva.
