Amending the FRBM Act

News: The finance ministry has excused itself from providing a projection of its fiscal consolidation plan.

What is the issue?

In the recent budget, the Union finance ministry committed to reducing the government’s fiscal deficit from 6.9 percent of gross domestic product or GDP in 2021-22 to 6.4 percent in 2022-23. Further, the deficit is set to decline to 4.5 percent by 2025-26.

However, the issue is, the government has not set a medium-term target for lowering the deficit. Just setting a target of 4.5 percent three-four years later is not the same as providing a glide path of fiscal consolidation, to which the government should stand committed.

Moreover, the government has ignored the need for amending the FRBM Act that was promised during the 2021-22 Budget.

Hence, no fiscal projections for the years 2022-23 and 2023-24 were presented along with that Statement.

Why there is a need to set a medium-term target for lowering the deficit and amend the FRBM Act?

First, the Budget does mention that the fiscal deficit target of 4.5 percent should be achieved in 2025-26. But there is silence on how the government intends to meet its debt reduction targets.

However, an amended FRBM Act or the medium-term fiscal consolidation plan would have been useful also for getting a sense of how the government planned to reduce its debt over the next few years.

Second, the Medium-term Expenditure Framework Statement is mandated under the FRBM Act.

Thirdly, The FRBM Act had earlier mandated that the Centre should try to limit the general government debt to 60 per cent of GDP and the Central government debt to 40 per cent of GDP, by March 31, 2025.

The Centre’s debt was estimated at 59.9 per cent of GDP in 2021-22 and will go up to 60.2 per cent in 2022-23. Reducing it by 20 percentage points in two years is going to be a huge task.

Source: This post is based on the article “Amending the FRBM Act” published in the Business Standard on 23^rd Jan 2022.