FISCAL RESPONSIBITY FRAMEWORK

FISCAL RESPONSIBITY FRAMEWORK

NEWS: Ahead of the Union Budget on February 1, economists are advocating for a revamp of India’s fiscal responsibility framework.

 

WHAT’S IN THE NEWS?

Call for a Revamp in Fiscal Responsibility

  • Economists are urging the government to overhaul India’s fiscal responsibility framework in anticipation of the Union Budget on February 1, 2024.
  • The current Fiscal Responsibility and Budget Management (FRBM) Act, which was enacted in 2003 and amended in 2018, is seen as inadequate for addressing India’s evolving economic realities and aspirations.
  • They argue that an updated framework is crucial to align fiscal policies with India’s Viksit Bharat 2047 vision, which aims for a developed economy by 2047.

 

Reasons for Framework Modifications

  • The demand for modifications stems from several factors influencing India’s economic landscape:
    • Evolving investment and savings patterns, driven by structural and behavioral changes in the economy.
    • Adjustments in nominal GDP growth projections, reflecting global and domestic economic uncertainties.
    • Shifting trends in effective interest rates, affecting the cost of debt and fiscal sustainability.
  • Economists highlight that these factors necessitate a fiscal framework that can address present-day challenges while ensuring long-term growth.

 

Reassessing the Debt-to-GDP Ratio

  • A key recommendation is to retain the combined debt-to-GDP ratio target at 60%, but to divide it equally between the Centre and the States at 30% each.
  • Under the 2018 FRBM amendment, the debt-to-GDP ratio was distributed as 40:20 (Centre:States). This was accompanied by an implicit allocation of fiscal deficit targets at 3% of GDP for each level of government.
  • Economists argue that this distribution is inconsistent, particularly when the aggregate nominal GDP growth is assumed to be uniform for both the Centre and the States.

 

Recommendations from EY Economy Watch

  • The EY Economy Watch report released recently provides several suggestions to update the fiscal responsibility framework:
    • Limit the total government debt (Central and State combined) to 60% of nominal GDP, with each taking an equal share of 30%.
    • Reinstate the revenue account balance as a central fiscal target for both the Centre and States, a measure aimed at reducing government dissavings.
    • Encourage a fiscal policy that creates room for productive investments, which are essential for sustaining economic growth over the long term.

 

Benefits of Revising the FRBM Act

  • Revisions to the FRBM Act would provide several key benefits:
    • Eliminating government dissavings, which currently deplete resources that could otherwise be allocated for development.
    • Facilitating an increase in investment spending, which has a multiplier effect on economic growth.
    • Strengthening the economy’s resilience to shocks by promoting fiscal discipline while enabling growth-oriented spending.
    • Laying a foundation for India’s transition to a developed economy by 2047, in line with the Viksit Bharat vision.

 

Fiscal Consolidation Goals for the Budget

  • Economists, including Devendra Kumar Pant from India Ratings and Research (Ind-Ra), stress the importance of adhering to fiscal deficit targets in the upcoming Budget.
  • The government is expected to meet its FY26 fiscal deficit target of 4.5% of GDP, reflecting a commitment to fiscal prudence.
  • However, post-FY26, the pace of fiscal consolidation is likely to slow, balancing tighter fiscal policies with the need to maintain robust economic growth.

 

Need for Major Reforms in the FRBM Act

  • Experts agree that a significant overhaul of the FRBM Act is necessary to ensure fiscal responsibility while supporting India’s ambitious economic goals.
  • One of the critical recommendations is to reinstate the revenue account balance as a fiscal target. This would help eliminate resource wastage caused by government dissavings and create room for productive investments.
  • These reforms are expected to address existing challenges and establish a robust fiscal framework for achieving long-term economic stability.

 

Outlook for the Union Budget 2024-25

  • The Union Budget 2024-25 is expected to introduce key measures to enhance fiscal discipline and promote sustainable economic growth.
  • Reforms in fiscal responsibility, including amendments to the FRBM Act, are likely to align government policies with India’s developmental priorities.
  • While challenges like tighter fiscal targets and changing economic dynamics persist, these reforms are anticipated to strengthen the fiscal ecosystem and position India on a path toward resilient and inclusive growth.

 

Source: https://www.thehindubusinessline.com/economy/economists-call-for-an-overhaul-of-fiscal-responsibility-framework/article69026774.ece#:~:text=Economy%20Watch%20suggests%20that%20a,the%20Central%20and%20State%20governments.