How to curb government’s fiscal irresponsibility

Source: The post is based on the article “How to curb government’s fiscal irresponsibility” published in “The Indian express” on 8th September 2023.

Syllabus: GS3- Economy- Fiscal policy

News: The article discusses how India’s Fiscal Responsibility Law (FRBM Act, 2003) aimed to control government borrowing has been regularly bypassed. Due to a provision in the Indian Constitution, the government can easily amend the law using money bills, leading to consistent delays in achieving fiscal targets. The article suggests rethinking this approach for effective fiscal control.

What is Fiscal Responsibility Law (FRL)?

FRL sets rules to control government borrowing and manage fiscal deficits.

Purpose: Ensures that governments don’t overspend today, preventing financial burdens in the future.

Global Examples:

Germany: Their “debt brake” restricts annual government borrowing to 0.35% of GDP.

US: They have a statutory debt ceiling which sets an upper limit on government borrowing.

India’s Experience:

FRBM Act, 2003: India’s version of FRL aimed at controlling government borrowing and achieving fiscal discipline.

Goals: One of the primary targets was to eradicate India’s revenue deficit by March 31, 2008.

Delays: Due to money bills, the deadline was shifted multiple times, finally settling on March 31, 2018.

Escape Clause: This is a provision that allows temporary deviations from fiscal targets due to unforeseen events. However, the very concept of a money bill in India acts as a major escape clause, letting the government easily amend the FRL.

How Fiscal Responsibility Law evolved in India?

Evolution of Fiscal Responsibility Law in India:

Constitutional Backing: Article 292 of India’s Constitution allows the Union government to borrow, but Parliament must set limits.

Initial Measures:

An expert committee led by EAS Sarma paved the way for the Fiscal Responsibility and Budget Management Act (FRBM) in 2003.

The Vijay Kelkar Task Force worked on its implementation in 2004.

Amendments and Delays:

FRBM’s original goal was to eliminate the revenue deficit by March 31, 2008.

Using money bills, this deadline was postponed multiple times: to 2009, 2015, and finally to 2018.

Issues with Money Bills:

The Finance Bill, being a money bill, can amend laws like the FRBM without full parliamentary scrutiny.

This loophole was used to dilute and delay fiscal targets under the FRBM Act, 2003.

A New Approach:

The FRBM Review Committee Report in 2017 proposed a new bill – the Debt Management and Fiscal Responsibility Bill – to address the challenges.

What is the need of Fiscal Responsibility Law?

Excessive Borrowing: Governments have a history of borrowing heavily, risking future financial health.

Election Driven Spending: Governments might overspend to appease voters before elections, increasing future burdens.

Economic Stability: To prevent the adverse impacts of excessive deficits on the economy, legal checks are necessary.

Constitutional Framework: Article 292 of India’s Constitution permits the Union government to borrow, but within limits set by the Parliament. An FRL defines those limits.

Accountability: A structured law ensures government remains accountable for its financial actions and decisions.