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[op-ed snap] Are fiscal risks increasing?

Note4students

Mains Paper 3: Economy | Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: The FRBM act

Mains level: Issues related to the FRBM act, and  the recommendations by the review committee.


News

Background of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003

  1. After the enactment of the FRBM Act and the related FRBM Rules in 2004, the target fiscal deficit to GDP ratio of 3% for the Union government was achieved only once, in 2007-08, when it was 2.5%
  2. That achievement has yet to be emulated again
  3. The FRBM Act was amended twice, in 2012 and 2015
  4. The revisions in 2015 shifted the date for achieving the 3% target to 2017-18
  5. By this year, the amended revenue deficit target was put at 2% of GDP

Proposal to amend the act again

  1. Budget 2018-19 has proposed amending the FRBM Act again, which will shift the target of 3% fiscal deficit-GDP ratio to end-March 2021
  2. No target has been set for revenue deficit

The main issue

  1. Missing the fiscal responsibility targets year after year and changing the statutory framework time and again bring the credibility of the government’s commitment to fiscal discipline in the spotlight

Key recommendations of the FRBM review committee: Not accepted by the government
FIRST

  1. In the proposed amendment to the FRBM Act, key recommendations of the review committee were not accepted
  2. It had wanted the target at which the fiscal deficit to GDP ratio was to be stabilised set at 2.5%
  3. The government apparently did not accept this recommendation and continued with the 3% target

SECOND

  1. The committee had not given up on the desirability of achieving revenue account balance
  2. It had specified a revenue deficit glide path, reaching 0.8% by 2022-23
  3. This too was not accepted

THIRD

  1. The Central government did not accept another recommendation of setting up a fiscal council, which could independently examine the economic case and justification for deviating from the specified targets

FOURTH

  1. In the committee’s recommendations, the debt-GDP levels of 60% and 40% of GDP for the general and Central governments, respectively, were to be achieved by 2022-23
  2. These target dates have been shifted to 2024-25

What about Fiscal Risks?

  1. Fiscal risks may also be higher with the reliance on extra-budgetary resources for financing a number of ambitious government spending programmes
  2. In the Budget for 2018-19, the total outlays for three focus areas, namely, agriculture and rural livelihoods, infrastructure and education, and health and social sectors, amount to 11.6% of the GDP
  3. These are to be funded using budgetary and extra-budgetary resources
  4. Any dependence on borrowing for these extra-budgetary resources along with the borrowing requirements of the State governments can put considerable pressure on interest rates

Back2basics

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

  1. The FRBMA is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence
  2. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008
  3. However, due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009
  4. In 2011, given the process of ongoing recovery, Economic Advisory Council publicly advised the Government of India to reconsider reinstating the provisions of the FRBMA. N. K. Singh is currently the Chairman of the review committee for Fiscal Responsibility and Budget Management Act, 2003, under the Ministry of Finance (India), Government of India
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