Economic Survey wants modification of FRBM Act

• India has “changed utterly” over the last 13 years since the Fiscal Responsibility and Budget Management (FRBM) was enshrined in law for prudent fiscal management.
• So there is a need to modify it so that it can reflect today’s India.

Economic survey on FRBM:

• According to economic survey, India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the FRBM Act.
• The pre-Budget document pointed out that since the 2008-09 global financial crisis, internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimising concerns about sustainability of the stocks (debt).
• India's experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the 'heavy lifting' on debt reduction.
• India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the ‘heavy lifting’ on debt reduction.
• The government has set a target for fiscal deficit of 3.5% of GDP for FY’17, a lower target than the 3.9% set for 2015-16 which was achieved.
• According to data released by the Controller General of Accounts, fiscal deficit in the April-December (2016-17) period was 93.9% of the Budget target against 87.9% for the same period a year ago. The April-December fiscal deficit in value terms was Rs. 5.01 lakh crore.

About FRBM:
The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09. Later, the target dates were reset and budget 2016-17 aims to realise the 3% fiscal deficit target by March 2018.
The Act gives slight flexibility to the government regarding the realisation of the target as well. It gives the responsibility to the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach. Following are the provisions of the Act in detail.

• The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be created.
• Setting annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
• The government shall end its borrowing from the RBI except for temporary advances.
• The RBI not to subscribe to the primary issues of the central government securities after 2006.
• The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security, calamity etc

By: Vishal