Subject: Economy

India's journey towards fiscal consolidation and responsible budget management led to the introduction of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The Act emerged as a response to deteriorating fiscal health, with public debt reaching 84.3% of GDP in 2003 and fiscal deficit hovering around 10% in 2001-02.

Reasons for Introduction of FRBM Act

• Mounting Public Debt: Between 1995-2003, India witnessed a sharp 14 percentage point increase in gross public debt ratio, necessitating urgent fiscal reforms.

• Persistent Deficit Problems: The period between 1992-2007 saw general government deficits averaging 7.7% of GDP and primary deficits at 2.4%, indicating structural fiscal imbalances.

• International Commitments: The need to align with global fiscal responsibility practices and enhance India's credibility in international financial markets.

Salient Features

• Deficit Targets:

  • Initial target to reduce fiscal deficit to 3% of GDP by March 2009.
  • Elimination of revenue deficit by March 2009.
  • Revised target of 40% central government debt-to-GDP ratio by 2024-25.

• Institutional Framework:

  • Establishment of quarterly reporting system.
  • Introduction of Medium-term Fiscal Policy Statement.
  • Provisions for transparency and accountability in fiscal operations.

Effectiveness and Critical Analysis

Positive Impacts

• Improved fiscal discipline through structured targets and monitoring mechanisms.
• Enhanced transparency in government financial operations.
• Better resource allocation and debt management practices.

Challenges and Limitations

• Target Achievement: Consistent failure to meet prescribed targets, leading to multiple amendments.
• Flexibility Issues: Rigid 3% fiscal deficit target criticized for constraining growth-oriented spending.
• Implementation Gaps: Weak enforcement mechanisms affecting compliance.
• External Shocks: COVID-19 pandemic led to temporary suspension, highlighting the need for flexibility during crises.

The FRBM Act represents a significant step towards fiscal consolidation, but its effectiveness has been mixed. Moving forward, there's a need to balance fiscal discipline with flexibility, as demonstrated by recent initiatives like the NK Singh Committee recommendations and the focus on quality of expenditure rather than just numerical targets.