Model Answer
0 min readIntroduction
The Indian economy in the late 1990s and early 2000s was characterized by high fiscal deficits and rising public debt, largely due to unsustainable levels of government spending. This prompted concerns about macroeconomic stability and long-term economic growth. In response, the Government of India enacted the Fiscal Responsibility Act (FRA) in 2003, aiming to ensure macroeconomic stability and reduce the fiscal deficit. The FRA laid down the rules and targets for the government’s fiscal policy, promoting transparency and accountability in public finances. This act was a landmark step towards establishing a sustainable fiscal path for India.
Salient Features of the Fiscal Responsibility Act, 2003
The Fiscal Responsibility Act, 2003, was a significant piece of legislation designed to ensure fiscal discipline. Its key features included:
- Fiscal Deficit Targets: The Act mandated the government to reduce the fiscal deficit to 3% of GDP within a specific timeframe. Initially, the target was set for 2009, but was later extended.
- Revenue Deficit Targets: It also aimed to eliminate the revenue deficit by 2007.
- Debt Management: The Act emphasized the need to manage public debt effectively and reduce the debt-GDP ratio.
- Transparency and Accountability: It required the government to publish fiscal policy reports, including information on fiscal risks and contingent liabilities.
- Annual Reporting: The government was obligated to lay down medium-term fiscal targets and report on its progress towards achieving them.
- Exceptions: The Act allowed for deviations from the targets only in exceptional circumstances, such as national security or economic slowdown, and required parliamentary approval for such deviations.
Extent of Adherence to the Provisions of the Act
The Government of India’s adherence to the FRA has been mixed. While initial progress was made in reducing fiscal and revenue deficits, several factors led to deviations from the targets over time.
- Initial Success (2003-2008): During the period 2003-2008, the government largely adhered to the FRA targets. The fiscal deficit was reduced from 4.8% of GDP in 2003-04 to 2.5% in 2007-08. The revenue deficit was also eliminated by 2007-08.
- Global Financial Crisis (2008-2009): The global financial crisis of 2008 led to increased government spending to stimulate the economy, resulting in a significant increase in the fiscal deficit. The fiscal deficit rose to 6.8% of GDP in 2008-09 and 6.9% in 2009-10.
- Post-Crisis Period (2010-2018): The government continued to struggle with fiscal consolidation in the aftermath of the crisis. While efforts were made to reduce the deficit, it remained above the target of 3% of GDP for most of this period.
- FRBM Act, 2018: Recognizing the limitations of the FRA, the government enacted the Fiscal Responsibility and Budget Management (FRBM) Act, 2018. This Act revised the fiscal deficit target to 3.1% of GDP for 2020-21 and 2.8% for 2021-22. It also introduced a fiscal deficit range, allowing for greater flexibility.
- COVID-19 Pandemic (2020-Present): The COVID-19 pandemic led to a massive increase in government spending to address the health crisis and support the economy. The fiscal deficit soared to 9.2% of GDP in 2020-21 and 6.9% in 2021-22, necessitating further deviations from the FRBM Act targets.
Recent Trends: The government has committed to achieving a fiscal deficit of below 4.5% of GDP by 2025-26. The focus has shifted towards sustainable debt management and improving the quality of fiscal consolidation.
| Year | Fiscal Deficit (% of GDP) | Revenue Deficit (% of GDP) |
|---|---|---|
| 2003-04 | 4.8 | 3.6 |
| 2007-08 | 2.5 | 0.0 |
| 2008-09 | 6.8 | 4.1 |
| 2020-21 | 9.2 | 7.4 |
| 2022-23 (Revised Estimates) | 6.4 | 2.8 |
Conclusion
The Fiscal Responsibility Act, 2003, was a crucial step towards establishing fiscal discipline in India. While the government has faced challenges in consistently adhering to its provisions, particularly during economic crises, the Act has played a significant role in promoting fiscal transparency and accountability. The FRBM Act, 2018, represents an evolution of the fiscal framework, providing greater flexibility while maintaining a commitment to long-term fiscal sustainability. The future success of India’s fiscal policy will depend on its ability to balance the need for economic growth with the imperative of maintaining fiscal prudence.
Answer Length
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