Fiscal Consolidation and FRBM Act

October 11, 2019
Economy

Fiscal Consolidation and FRBM Act!!! In the previous post, we have read the Finance Commission and in this post, we discussed Fiscal consolidation and FRBM act.

Fiscal Consolidation is a process of reducing the government’s fiscal deficit and improving the fiscal health of the government. In the last two years, India has continued on the path of fiscal consolidation some reasons including lesser fuel subsidies, targeted social sector schemes, better tax revenue generation, and better-aligned expenditure.

Vijay Kelkar Committee

The Vijay Kelkar committee published a roadmap for fiscal consolidation for the period 201-13 to 2014-15. The main objective of this report was to address a major issue of fiscal deficit in India. This Committee had made several recommendations including a roadmap for government towards subsidy cuts, oil prices, etc. Increasing disinvestment, the process of selling government stake in public enterprises. One of the radical recommendations was that the government should raise the prices of food items sold through PDS every time when the minimum support prices are revised.

Fiscal Responsibility and Budget Management(FRBM) Bill was introduced in the parliament of India in the year 2000 by Atal Bihari 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. It 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.

The objective of the FRBM Act

The main objective of the FRBM Act was the elimination of revenue deficit and bringing down fiscal deficit. other objectives are:

  • Introduction of a transparent system of financial management within the country.
  • To certain fiscal stability in the long run
  • Ensuring equitable distribution of debt over the years

N K Singh Committee

In May 2016, the Indian government set up a Fiscal Responsibility and Budget Management (FRBM) committee headed by N K Singh. The committee submitted its report in January 2017, titled ‘The Committee in its Responsible Growth: A debt and Fiscal framework for 21st century’. some important recommendations of the committee –

N K Singh Report
  • The committee asks the governments to continue on the fiscal and revenue deficit targets but Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India. The government should target a 60% debt-GDP target with a 40% limit for the center and 20% limit for states to be achieved by 2023.
  • The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the center should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
  • The Committee also recommends that the central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023, from a projected value of 2.3% in 2017.
  • The committee advocated the formation of a fiscal council to advise the government to matter related to fiscal consolidation.
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