Modify FRBM Act for the India of tomorrow

Published - January 31, 2017 10:58 pm IST

NEW DELHI: India has “changed utterly” over the last 13 years since the Fiscal Responsibility and Budget Management (FRBM) was enshrined in law for prudent fiscal management, and therefore, the FRBM operational framework designed in 2003 “needs to be modified to reflect the India of today, and even more importantly the India of tomorrow,” according to the Economic Survey.

This suggestion assumes significance in the backdrop of the N.K. Singh panel recently submitting its report on revising the FRBM Act to finance minister Arun Jaitley.

Noting that India’s economic experience shows that the fiscal activism embraced by advanced economies — giving a greater role to counter-cyclical policies and attaching less weight to curbing debt — was not relevant for India, the Survey said India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the FRBM Act.

The pre-Budget document pointed out that since the 2008-09 global financial crisis, internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimising concerns about sustainability of the stocks (debt).

However, India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns, it observed.

“It (India’s experience) has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the ‘heavy lifting’ on debt reduction,” the Survey said.

Even as these FRBM’s basic tenets — or the fundamental validity of the fiscal policy principles — remain valid, “… the task of the FRBM Review Committee (will be) to set out a new vision, an FRBM for the 21st century.”

The government has set a target for fiscal deficit (the gap between expenditure and revenue for the financial year) of 3.5% of GDP for FY’17, a lower target than the 3.9% set for 2015-16, which was achieved. In value terms, the 3.5% is ₹5.33 lakh crore.

According to data released by the Controller General of Accounts, fiscal deficit in the April-December (2016-17) was 93.9% of the Budget target against 87.9% for the same period a year ago. The April-December fiscal deficit in value terms was ₹5.01 lakh crore.

In his budget 2016-17 speech, Mr. Jaitley had said: “There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the Government to deal with dynamic situations. There is also a suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively, in the economy.”

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