Model Answer
0 min readIntroduction
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was a landmark legislation enacted by the Government of India to ensure macroeconomic stability and fiscal discipline. Prior to the Act, India faced persistent fiscal deficits, leading to rising public debt and vulnerability to economic shocks. The FRBM Act aimed to reduce the fiscal deficit, eliminate revenue deficits, and manage public debt sustainably. It was a response to the fiscal crisis of 1991 and the need for a rule-based fiscal policy framework. The Act has undergone amendments, most notably in 2018, to align with evolving economic realities and provide greater fiscal space for the government.
Main Features of the FRBM Act, 2003
The FRBM Act, 2003, laid down a framework for fiscal management with the following key features:
- Fiscal Deficit Targets: The Act initially mandated the government to reduce the fiscal deficit to 3% of GDP by 2008-09 and subsequently maintain it at that level.
- Revenue Deficit Targets: It aimed to eliminate the revenue deficit by 2007-08. The revenue deficit represents the difference between revenue receipts and revenue expenditure.
- Debt Targets: The Act stipulated targets for the level of public debt, aiming to reduce it over time.
- Transparency and Accountability: The Act mandated the government to publish Fiscal Policy Statements, Budget Implementation Reports, and Medium-Term Fiscal Frameworks to enhance transparency and accountability.
- Exceptions and Escape Clauses: The Act provided for exceptions in extraordinary circumstances, such as national security, economic slowdown, or natural disasters, allowing the government to deviate from the targets.
Amendments to the FRBM Act (2018)
The FRBM Act was amended in 2018 to provide greater flexibility to the government. Key changes included:
- Shift in Fiscal Deficit Target: The government was given the flexibility to deviate from the fiscal deficit target of 3% of GDP by 0.5% in exceptional circumstances.
- Focus on Debt Management: The amendment emphasized the importance of debt management and introduced specific targets for debt levels.
- Medium-Term Fiscal Framework: The Act mandated the preparation of a Medium-Term Fiscal Framework (MTFF) outlining the fiscal targets for the next five years.
- Fiscal Council: The amendment proposed the establishment of a Fiscal Council, an independent body to provide fiscal forecasts and assess the government’s adherence to the FRBM targets. (However, the Fiscal Council is yet to be fully operationalized).
Extent of Success in Achieving Targets
The success of the FRBM Act in achieving its targets has been mixed.
Achievements
- Initial Fiscal Consolidation: In the years following the Act’s enactment, India witnessed a period of fiscal consolidation, with the fiscal deficit declining from 6.9% of GDP in 2003-04 to 2.5% in 2007-08.
- Revenue Deficit Elimination: The revenue deficit was eliminated by 2007-08, as targeted.
- Increased Transparency: The Act led to increased transparency in fiscal reporting and budgeting.
Shortcomings and Deviations
- Post-Global Financial Crisis: The global financial crisis of 2008-09 led to a significant increase in fiscal deficit as the government implemented stimulus packages to mitigate the economic impact.
- Persistent Deviations: Despite the Act, the government has frequently deviated from the fiscal deficit targets, particularly during periods of economic slowdown or political pressures. According to data from the Controller General of Accounts (CGA), the fiscal deficit exceeded 3% of GDP in several years, including 2009-10, 2011-12, 2013-14, 2015-16, 2016-17, 2017-18, 2019-20, 2020-21 and 2022-23.
- Impact of COVID-19 Pandemic: The COVID-19 pandemic led to a substantial increase in fiscal deficit in 2020-21 and 2021-22, as the government implemented large-scale relief measures.
- Limited Impact on Debt Levels: While the Act aimed to reduce public debt, the debt-to-GDP ratio has remained relatively high, particularly in recent years.
- Fiscal Council Delay: The non-operationalization of the Fiscal Council has weakened the institutional framework for fiscal discipline.
| Year | Fiscal Deficit (% of GDP) | Revenue Deficit (% of GDP) |
|---|---|---|
| 2003-04 | 6.9 | 4.1 |
| 2007-08 | 2.5 | 0.0 |
| 2019-20 | 3.7 | -0.7 |
| 2020-21 | 9.2 | -4.2 |
| 2022-23 (Revised Estimates) | 6.4 | -2.8 |
Conclusion
The FRBM Act has played a significant role in promoting fiscal discipline and transparency in India. While it achieved initial success in reducing fiscal and revenue deficits, its effectiveness has been hampered by economic shocks, political considerations, and deviations from the prescribed targets. The 2018 amendments provided greater flexibility but also diluted the stringency of the Act. Strengthening the institutional framework, particularly through the operationalization of the Fiscal Council, and adhering to a credible fiscal consolidation path are crucial for ensuring long-term macroeconomic stability and sustainable public finances. A rules-based fiscal framework remains essential, but it needs to be adaptable to changing economic circumstances.
Answer Length
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