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New FRBM Framework
The structural inability to control revenue deficits needs different solutions from the usual argument that the utilisation of government expenditure is inefficient and that the government should spend less. It is time to relook at the way the union government spends.
The Government of India has proposed a very critical amendment to the Fiscal Responsibility and Budget Management (FRBM) Act in Union Budget 2018–19. As mentioned, “in the proposed FRBM architecture, Government will simultaneously target debt and fiscal deficit, with fiscal deficit as an operational target and do away with the deficit targets on revenue account that is revenue deficit (RD) and consequentially, effective revenue deficit (ERD).” In 2003, the union government enacted the FRBM Act. The act required the government to bring down the fiscal deficit to gross domestic product (GDP) ratio to 3% and eliminate revenue deficit by 2008–09.
Compliance with the zero revenue deficit target in the FRBM Act implies imposition of hard budget constraint on government to prevent use of borrowed resources for the purpose of consumption expenditure such as wages and salaries, interest payment, pension, payment of subsidies, etc. With discontinuation of the revenue deficit as a target for compliance, in the budget 2018–19, a revised fiscal correction path has also been introduced. As specified in this path, the Government of India (GoI) would only be able to achieve the 3% of GDP fiscal deficit target in 2020–21 instead of 2018–19. Though there is no target, revenue deficit would remain stubbornly high and would be at 1.6% of GDP in 2020–21. The debt–GDP ratio, which is estimated at 48.8% of GDP in 2018–19, is expected to decline to 44.6% of GDP in 2020–21. This article analyses the implications of the changes in the FRBM Act on union finance and on fiscal management of GoI.
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