Finance Commission – Issues related to devolution of resources

Why has Kerala sought a relaxation of FRBM rules?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act

Mains level : Read the attached story

Kerala CM has urged the Centre to provide Kerala with flexibility under the Fiscal Responsibility and Budget Management (FRBM) Act so as to ensure that the State’s finances are not adversely impacted.

FRBM Act

  • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
  • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
  • Subsequently, the FRBM Act was passed in the year 2003.

Features of the FRBM Act

  • It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
  1. Macroeconomic Framework Statement
  2. Medium Term Fiscal Policy Statement and
  3. Fiscal Policy Strategy Statement

Fiscal Indicators

It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement viz.

  1. Revenue deficit as a percentage of GDP,
  2. Fiscal deficit as a percentage of GDP,
  3. Tax revenue as a percentage of GDP and
  4. Total outstanding liabilities as a percentage of GDP

Why is Kerala seeking flexibility under the FRBM?

  • Kerala was one of the earliest States to announce an economic package of ₹20,000 crore to mitigate the impact on livelihoods and overall economic activity.
  • Kerala’s current fiscal position means that it can borrow about ₹25,000 crore during the financial year 2020-21.
  • However the State government is understandably concerned that the stringent borrowing cap under the fiscal responsibility laws should not constrain its borrowing and spending ability over the remaining 11 months.
  • This is a crucial period when the state would have to meet other expenditure for routine affairs related to the running of the State’s socio-economic programmes as well as the post pandemic recovery.

How does a relaxation of the FRBM work?

  • The law does contain what is commonly referred to as an ‘escape clause’.
  • Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing grounds that include national security, war, national calamity, collapse of agriculture, structural reforms and decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
  • The ongoing pandemic could be considered as a national calamity.
  • This would allow both the Union government and States including Kerala to undertake the much-needed increases in expenditure to meet the extraordinary circumstances.

When have the FRBM norms been relaxed in the past?

  • There have been several instances of the FRBM goals being reset.
  • But the most significant FRBM deviation happened in 2008-09, in the wake of the global financial crisis, when the Centre resorted to a focused fiscal stimulus: tax relief to boost demand and increased expenditure on public projects.
  • This was aimed to create employment and public assets, to counter the fallout of the global slowdown.
  • This led to the fiscal deficit climbing to 6.2%, from a budgeted goal of 2.7%.
  • Simultaneously, the deficit goals for the States too were relaxed to 3.5% of GSDP for 2008-09 and 4% of GSDP for fiscal 2009-10.

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