A flexible deficit target
The author explains why his suggestion of the fiscal deficit at 4.5% of GDP differs from P Chidambaram's 4.1% in the interim Budget
Abstract:
A controversy was recently triggered when I told an interviewer that the fiscal deficit at 4.5 per cent of gross domestic product (GDP) in the fiscal year 2014-15 was within tolerance limits if accompanied by an increase in capital expenditure from 1.76 per cent of GDP in the interim Budget to two per cent. Former finance minister P Chidambaram reacted sharply to the suggestion, asking rhetorically, "Will the government follow the Kelkar-recommended path and affirm the Budget estimate fiscal deficit of 4.1 per cent for 2014-15 [as provided in his interim Budget]? Or will the government take the advice of Arvind Panagariya (wrong advice in my view) and allow the fiscal deficit to rise?"
There are both political and economic responses to the objections aided by Mr Chidambaram. The political response is twofold. First, as R Jagannathan has already noted in a brilliant column, Mr Chidambaram himself is responsible for the original sin of deviating from the Kelkar-recommended path. Indeed, he did much worse, straying from it year after year, never reaching the goal.