FRBM Act was enacted in 2003 with the intention of reining in the fiscal profligacy and making the Executive’s fiscal policies accountable to the Legislature.
This was done in order to maintain inter-generational equity with respect to government borrowings, in order to not burden the successive generations with sky-high debts and interest payments.
The panel was constituted because –
After a target of achieving 3% fiscal deficit and eliminating revenue deficit was mandated by the original act, it was amended subsequently since the target was not achieved. The act was amended to relax the deadline for achieving the target.
The target was not achieved because India was increasingly getting integrated into the global economy. Global shocks following the U.S. subprime crisis of 2008, the 2011 Eurozone crisis, commodities crash due to Chinese slowdown, and continuing deflationary trends in Japan and EU slowed down’s Indian economy as well, to an extent.
It was necessary to ramp up public spending when private investment had faltered, in order to maintain a counter-cyclical fiscal policy. The committee had to examine the feasibility of having a fiscal deficit ‘range’ instead of a fixed target, so as to give the Executive elbow room to align the spending with the credit cycle.
It has also been said that the figure of 3% is arbitrary, taken from the West, and not suitable for Indian economic conditions. So the committee would suggest a new fiscal deficit range for the future.
Its recommendations would be important as they would provide government the roadmap for a revamped fiscal consolidation path without compromising on GDP growth, and provide it the necessary elbow room to operate an efficient counter-cyclical fiscal policy to deal with global exigencies in the future.
