ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 10th August. Click Here for more information.
Source: The post is based on the article “Either repeal or revise the country’s fiscal law” published in “Live mint” on 25th October 2023.
UPSC Syllabus: GS3: Economy- Fiscal policy
News: The article discusses India’s fiscal position and its deviation from the Fiscal Responsibility and Budget Management (FRBM) Act’s 3% deficit cap. Despite exceeding this limit, the economy hasn’t faced severe inflation or high lending rates post-COVID. The article suggests reconsidering the FRBM Act’s relevance and possibly adjusting the government’s spending approach.
Write about FRBM Act?
FRBMA stands for the Fiscal Responsibility and Budget Management Act enacted in 2003, aims to promote fiscal discipline, transparency, and accountability in the management of the India’s finances.
Fiscal Responsibility and Budget Management Act, 2003 is regulated by the Department of Economic Affairs, Ministry of Finance.
Fiscal Responsibility and Budget Management Act ,2003 ensures intergenerational equity in fiscal management and long-term macro-economic stability by reducing fiscal deficit. It further ensures effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability.
Read for more details: FRBM Act
What is the current fiscal position of India?
Fiscal Status: India’s fiscal position is termed ‘solid’ by the Union finance ministry.
Revenue and Expenditure: There has been consistent revenue growth, and the Centre has prudently rationalized its spending.
Deficit Target: The goal is to reach a 5.9% deficit for the fiscal year 2023-24.
Comparison to FRBM Act: This 5.9% deficit stands out as it’s nearly twice the 3% cap mandated by the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
Economic Repercussions: Post-COVID, even with such deficits, neither high inflation nor soaring lending rates have been observed.
Economic Recovery: There’s a robust recovery in commercial activity, and consumer demand is bouncing back.
Central Bank’s Role: The central bank has played a pivotal role in ensuring stability, monitoring monetary conditions amidst the increased deficits, and fostering an environment for economic recovery.
What is the relevance of the FRBM Act in the present situation?
FRBM Act’s Original Intent: The FRBM Act of 2003 set a 3% deficit cap for India.
Current Scenario: India aims for a 5.9% deficit in the fiscal year 2023-24, surpassing the FRBM’s stipulation.
Act’s Modern Relevance: Many consider the 3% cap outdated in the current economic environment.
Provisions for Crises: The Act has flexibility for extraordinary situations, like the COVID pandemic.
Government’s View: The government’s deviation suggests they might see the Act more as a guideline than a strict rule.
Need for Policy Flexibility: Economic experts believe fiscal policy should have room to adjust, especially when state intervention can stabilize the economy.
Post-COVID Economic Impact: Despite exceeding the FRBM’s limits after COVID, India hasn’t experienced high inflation or lending rates, raising questions about the Act’s strictness in today’s context.
Questions to practice:
Evaluate the effectiveness of the FRBM Act in the context of India’s current ‘solid’ fiscal scenario and its deficit target for 2023-24.
