Answer:

Introduction:

Fiscal discipline and sound fiscal policies are essential for maintaining macroeconomic stability and propelling economic growth. Recognizing this, the Indian government enacted the Fiscal Responsibility and Budget Management (FRBM) Act in 2003. The Act aims to ensure fiscal discipline at the center, reduce the fiscal deficit, and bring transparency in fiscal operations. Further emphasizing the gravity of a disciplined fiscal approach, the Fiscal Responsibility and Budget Management (FRBM) Review Committee Report recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.

Body:

Objectives of the FRBM Act:

• Limitation of Deficits: The Act focuses on reducing the fiscal and revenue deficits to manageable levels.
• Prudent Public Debt Management: Ensure that government debt remains sustainable in the medium to long term.
• Transparency: Enhance transparency in fiscal operations of the Government.

Key Provisions of the Act for Fiscal Consolidation:

• Fiscal Targets: The Act mandated the Central government to eliminate revenue deficit and reduce fiscal deficit to an agreed-upon percentage of the GDP by a set timeline.
• Borrowing Guidelines: The central government can only borrow from the Reserve Bank of India (RBI) for temporary periods, not for financing its deficit.
• Medium-Term Fiscal Policy Statement: A rolling three-year fiscal policy strategy statement must be presented, outlining the government’s policies for the coming three years
• Measures to Enhance Transparency: The government is required to lay before the parliament several statements like the Medium-Term Fiscal Policy Report, Fiscal Policy Strategy Statement, and Macroeconomic Framework Statement. This has made the government’s fiscal stance and future strategy clearer to stakeholders, aiding in better decision-making for businesses and investors.
• Escape Clause: Recognizing that in specific extraordinary circumstances, fiscal targets can be exceeded, the Act provides an escape clause. For instance, during periods of sharp economic downturn, national security concerns, or other exceptional grounds. In the face of the global economic downturn in 2008-09, India had to deviate from the prescribed fiscal consolidation path. The escape clause provided a legitimate framework for this deviation, emphasizing the Act’s flexibility.

Conclusion:

The FRBM Act, 2003, marked a pivotal step in India’s journey towards establishing fiscal discipline and sustainability. Though challenges remain in strict adherence to its provisions, the Act has undoubtedly provided a structural framework ensuring transparency, accountability, and a roadmap for fiscal prudence. As with any economic legislation, the Act’s true test lies in its flexible yet disciplined implementation, striking a balance between growth imperatives and fiscal sustainability.

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